Unemployment Insurance and Employment

Apparently Michelle Malkin went on This Week and, in the course of arguing against an extension of Unemployment Insurance benefits said that Larry Katz believes such an extension would increase unemployment. Turns out that Katz believes no such thing.

Of course it’s hard to deny that, in isolation, the availability of unemployment benefits has some disemployment effect. I know of at least one person who decided to take advantage of severance money, pre-existing savings, and U to finish his novel rather than try to locate the not-so-appealing positions available in the depths of a recession. But this is primarily relevant when unemployment is low. If you get laid off when the economy is near to full employment, the available of UI money lets you act a bit less desperate and gives you more chance to seek out different job possibilities. That probably increases frictional unemployment somewhat but it seems like a price worth paying.

Amidst mass unemployment things probably look different. The first impact of cutting off UI payments would be that recipients will have have to scrimp even more on their purchases. You’d get a rise in home foreclosures and loan defaults, a decline in consumer spending, and a new wave of layoffs. You would also, yes, somewhat hasten the pace at which people become willing to accept jobs at market-clearing (i.e., low) wages but completely aside from the human suffering involved in this process in the first instance you’d be increasing the number of unemployed people. Most of all, as long as the total level of employment is shrinking there’s only so much impact worker-side desperation could possibly have on the economy. At the moment, we’re really still in a situation where we should be all about avoiding tipping points that push us toward a truly bleak macroeconomic picture, and Unemployment Insurance and other safety net measures are an important part of that.