Tuesday, March 2, 2010

What part of beneath contempt don't we understand?

Several news sources, including the Huffington Post, report the following quotes from Arizona Senator Jon Kyl, PTR whip:

[unemployment benefits dissuade people from job-hunting] "because people are being paid even though they're not working."

[Unemployment insurance] "doesn't create new jobs. In fact, if anything, continuing to pay people unemployment compensation is a disincentive for them to seek new work"

"And the same thing with the COBRA extension and the other extensions here".

[COBRA = "Consolidated Omnibus Budget Reconciliation Act" enables families to continue their health insurance for up to 18 months after employment is terminated. It was passed under President Reagan by -- you guessed it -- reconciliation.]

So far, not a single example of a layed-off person who would rather collect a tiny fraction of his/her previous salary in unemployment benefits has been produced by PTR researchers, but they're still working on it.

Yes, that's why it's called the PTR = Party for The Rich. Their program is sometimes called LTEC = Let Them Eat Cake, or just simply Antoinette.


  1. What he's saying isn't really radical to most economists actually. In fact, our good friend Larry Summers is a big proponent of this theory. In fact, Larry Summers has estimated in the past that if unemployment insurance (henceforth UI) were eliminated, unemployment would fall by over 750,000! (see: http://www.nber.org/papers/w4434 ; http://www.nber.org/papers/w0920). I think you'd probably see some increase in employment, but no where near 750,000
    There are two arguments that economists use.

    One is that it delays transition time between jobs because it decreases the urgency of finding a new job, which is an argument that I'm fairly sympathetic too. There is a decent amount of evidence that UI does create a longer transition time between jobs. However, I think the effect is dramatically overstated by most economists though and I think the results are pretty model-dependent. The argument put forth by Kyl is really only relevant and pronounced in the European welfare states where the benefits are extremely generous. The effects seem pretty small in the US and I think the benefits from UI outweigh the distortionary effects of the insurance. If the effects were larger I would likely switch and call for the end of UI, but the effects are much smaller than most economists realize (I believe anyway).

    The second argument I'm a bit more skeptical of, and it's one that economists actually think is pretty significant. The argument is that it might entice someone not to find a job at all, or significantly delay transition time, because they value leisure more than work. Summers described this argument pretty nicely in a summary argument:

    "Consider, for example, an unemployed person who is accustomed to making $15.00 an hour. On UI this person receives about 55 percent of normal earnings, or $8.25 per lost work hour. If that person is in a 15 percent federal tax bracket and a 3 percent state tax bracket, he or she pays $1.49 in taxes per hour not worked and nets $6.76 per hour after taxes as compensation for not working. If that person took a job that paid $15.00 per hour, governments would take 18 percent for income taxes and 7.65 percent for Social Security taxes, netting him or her $11.15 per hour of work. Comparing the two payments, this person may decide that an hour of leisure is worth more than the extra $4.39 the job would pay. If so, this means that the UI raises the person’s reservation wage to above $15.00 per hour."

    Now, the evidence for this effect is quite mixed and it's hard to disentangle all the competing factors, but I think it's likely a minor effect. Firstly, I've always been confused why the person wouldn't value leisure more before getting the insurance and then work less, therefore reaching his optimal work-leisure tradeoff prior. Secondly, I don't think this argument holds for someone making $15.00 an hour, and it's the low-income people who experience long-term employment. This bracket is often living paycheck to paycheck and so they would value work a lot more than leisure since they need to work to survive.

  2. Part 2:

    Anyway, I think the effects are likely counter-cyclical (although I haven't constructed a formal model of UI embedded in a business cycle model, since I'm not that interested in things like UI and I'm working on something else) since there is a greater incentive to look for a job in bad times when jobs are being rationed then a good times since it will be much more difficult to find one and so urgent search would seem to go up since opportunities are limited. So, all in all, I think UI does lessen the transition time in good times ever so slightly, but, I think that the distortionary effects of UI are almost zero in the current state we are in.

    Of course, Kyl has never thought of the cyclical effects of unemployment. Kyl has never thought about the weakness of his argument and how likely small the effect is. Kyl just wants to make sure poor people aren't helped by the government and he's latching on to an economic argument he really only understands superficially.