Wednesday, December 8, 2010

Why Extension of Unemployment Benefits Will Prolong High Unemployment

It hasn't been widely mentioned or discussed, but  President Obama’s tentative deal to extend the Bush-era tax, includes a proposal for a 13-month extension of emergency unemployment insurance benefits.
This will result in a huge drag on improving the unemployment picture (Though I believe unemployment will still go down more dramatically then most expect).

If you pay people not to work, they don't. This should not be a difficult concept for people to understand. Yet, somehow, it is complicated enough to most minds that the Nobel committee felt the award in economics should be given this year to three economists who make this point. Here's the committee (my emphasis):
Peter Diamond has analyzed the foundations of search markets. Dale Mortensen and Christopher Pissarides have expanded the theory and have applied it to the labor market. The Laureates' models help us understand the ways in which unemployment, job vacancies, and wages are affected by regulation and economic policy. This may refer to benefit levels in unemployment insurance or rules in regard to hiring and firing. One conclusion is that more generous unemployment benefits give rise to higher unemployment and longer search times.
This is a point that Fed Chairman Bernanke doesn't seem to get. In his recent 60 Minutes interview, as I have pointed out, it appears he simply projects out current unemployment rates without thinking or understanding about the mechanism behind the unemployment. Very scary.

1 comment:

  1. The irony here is that Obama went out on a limb for a special deal that will ultimately hurt his cause by keeping unemployment higher in the months before his re-election campaign. We have Napolean demanding a land war in Asia.