The argument that providing unemployment benefits can reduce employment seems pretty clear. People take jobs, in part, to get money. So to the extent that you maximize the hardship associated with not having a job, people will be more willing to engage in desperate measures to get a job. Right now, for example, North Dakota has a far below average unemployment rate, but relatively few people are eager to relocate to North Dakota. This is perfectly understandable. But if we eliminated unemployment benefits, people would be a bit more motivated. Even better, we could deliver regular public lashings to unemployed people and then they’d be in a hurry to get themselves to North Dakota and get a job.
This kind of thing motivates hedge fund manager Todd G. Buchholz to argue for the more humane path of sharply curtailing unemployment benefits and adding a “signing bonus” to further motivate people to get jobs. The idea here is that labor markets would “clear” more quickly, as people become more willing to accept worse jobs. Now on the flipside to this you might marshall Raj Chetty’s various arguments including the key point that making people more desperate leads to worse job-matching and worse outcomes over the long-term. If you have a skilled engineer, you actually want him to stay unemployed and wait for an engineering position to open. Frightening him into taking a job at Subway two weeks sooner doesn’t help you in the long run.
What’s more, when you scare/bribe the engineer into taking the Subway job, you have to ask yourself what happens to the kind of person who might be working at Subway in a full-employment economy. Pushing skilled workers into lower paid, lower quality jobs just pushes less skilled workers into unemployment or out of the labor force. In a good FT op-ed today, Larry Summers offers the general point that “training programmes or measures to increase work incentives for those with high and low incomes may affect who gets the jobs, but in a demand-constrained economy will not affect the total number of jobs.”
Now of course over the long-term, more skills will make a country richer. And more incentives to do paid work will increase the total amount of paid work that gets done. But at the moment we’re suffering from a huge shortfall in aggregate demand due largely to the huge gap in personal consumption. Lots of different kinds of policies could close that gap or substitute for closing it, but increasing the supply of labor won’t.