It's the Lack of Jobs that Causes Unemployment

 

Last week, in a post on the how dreadful the job market is, I mentioned that “some” argue that the 99-week limit on Unemployment Insurance is actually creating unemployment. One of those “some” is Robert Barro, an economics professor at Harvard University and a senior fellow at Stanford University’s Hoover Institution, who articulates this claim in a Wall Street Journal op-ed (where else?) yesterday.

The unemployment-insurance program involves a balance between compassion–providing for persons temporarily without work–and efficiency. The loss in efficiency results partly because the program subsidizes unemployment, causing insufficient job-search, job-acceptance and levels of employment. A further inefficiency concerns the distortions from the increases in taxes required to pay for the program.

Barro sums it all by saying that if it weren’t for this overly generous safety net, the unemployment rate would be 6.8% instead of today’s 9.5%.

But, as Bob Williams at the Tax Policy Center notes, a new study by two researchers at the Federal Reserve Bank of San Francisco paints a totally different picture.

Research by Rob Valletta and Katherine Kuan at the Federal Reserve Bank of San Francisco suggests that the effect of extended benefits would be much smaller than Barro’s estimate, probably less than half a percentage point. They found only small differences between how quickly job losers (who qualify for unemployment benefits) and job quitters (who don’t) find new jobs, suggesting that duration of benefits has only a small effect on today’s high unemployment rate.

Valletta’s and Kuan’s study also conveniently makes sense when you consider that for every job opening there are five potential applicants.

 

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