Supply, Demand, and Unemployment Benefits
Ben Casselman points out that we’ve had a sort of natural experiment in the alleged effects of unemployment benefits in reducing employment. Extended benefits were cancelled at the beginning of this year; have the long-term unemployed shown any tendency to find jobs faster? And the answer is no.
Let me parse this a bit more, and ask, how was it, exactly, that reduced benefits were supposed to encourage employment in the first place?
Making the unemployed miserable arguably increases labor supply, as workers become less choosy and more willing to take whatever job they can find. But the US labor market in 2014 isn’t constrained by supply, it’s constrained by demand: given what firms can sell, they have no need for as many hours of work as workers are willing to give.
So make the long-term unemployed more desperate; so what? They can’t do anything to increase the amount of work demanded, and in fact their reduced purchasing power reduces labor demand.
You might imagine that the long-term unemployed, through their desperation, might take jobs away from existing workers — but it’s not easy to see how that might work, and there’s no evidence that this is happening.
So the point is that as long as you understood that we have a demand-constrained economy, you knew that cutting off the unemployed would produce all pain, no gain. And your prediction was right.
Oh, and this constitutes another source of evidence that the “regular economics” extolled by Barro and others — that is, economics in which unemployment benefits must reduce employment because they’re “paying people not to work” — is just wrong in a depressed economy.
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National Jobs for All Coalition
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