Thursday, July 22, 2010

Unemployment Insurance Break Even Point Discussion

Started my morning off catching up on last night's The Conservative Wahoo Live. The discussion about extension of unemployment benefits reminded me of this recent post by Keith Hennessey on the subject that makes a lot sense to me. As CW knows, I have a pretty dim view of people in general. Nevertheless, I can't bring myself to believe that the extension of this benefit is going to compel that many people to slough off finding a job to spend it trying to look like Dr. Jeff Life or otherwise. Mr. Hennessey suggests that at the current level of unemployment, while there are surely people snowbirding it, there are still enough people who truly need it to make the extension warranted. He does go on to say that below a certain percentage - in his mind 8% - the tradeoff probably no longer makes sense.

There are negative supply-side effects from providing unemployment insurance (UI) benefits. The best estimates I have seen suggest the current 9.5% unemployment rate is 0.5 – 1.0 percentage points higher than it would otherwise be because of previously-enacted expanded and extended UI benefits. I will start by using the bottom end of that range (0.5).

I use 5.0% to represent full employment. We are 4.5 percentage points above that. If we did not have expanded UI we would be 4.0 percentage points above full employment. That means for every 9 people out of work, one is being discouraged from taking a new job because of the expanded benefits (0.5 / 4.5). Said another way, eight people who would like a job but cannot find one are getting more generous UI benefits for each person who is getting those same benefits and choosing not to take a new job. We have to make a tradeoff between our desire to help those who want a job but cannot find one and those who would choose to stay unemployed while they have extra benefits.

The judgment call for policymakers: does an 8:1 ratio make a UI extension good policy? I say yes. If, however, the supply-side disincentive is a full percentage point, then we have a 3.5:1 ratio. That is a tougher call, but I would still say yes. Given the range of possible supply-side disincentives, I would recommend extending UI benefits when the unemployment rate is 9.5%.

I assume that most everyone would agree that at full employment it is foolish to provide more generous UI benefits. So somewhere between 5.0% and 9.5% there is a breakpoint at which the supply-side disincentive is not worth the compassion benefit of providing aid to others who want a job but cannot find one.

At a 7% rate our ratio is between 1:1 and 3:1. At an 8% rate it’s between 2:1 and 5:1. My breakpoint is around 8%. I would support a (paid for) UI extension as long as the rate is 8% or above. There is nothing magical about this judgment, and yours may differ.


Tom de Plume said...

Thank you for picking up on the Cenegenics reference.

The argument does make some sense. There is a big difference in one's ability to find employment when the rate is 6% vs 10%.

"The Hammer" said...

5% is considered full employment? Since when?
Here's what I think. I think a year from now we'll be looking back on the Summer of 2010 as the good old days.

The Conservative Wahoo said...

I take a backseat to no man in my admiration for Mr. Hennessey, but I think he's just plain got it wrong here.

While he wraps this all in a veneer of "math", it really all boils down to "compassion" as in "So somewhere between 5.0% and 9.5% there is a breakpoint at which the supply-side disincentive is not worth the compassion benefit of providing aid to others who want a job but cannot find one."

Kinda squishy if you ask me, especially when the bill's not paid for. Why not fund it out of the 50 % of "stimulus" spending not spent? Why not fund it out of TARP?

It is also not compassionate to saddle the next generation with the burden of lavish benefits for the present.

The Conservative Wahoo said...

Hammer--I see things quite differently--history's about to repeat itself, a la 1994.

The Republicans will destroy the Dems in November--perhaps not taking a chamber, but certainly they will send a HUGE message to the President. He will tack to the center (like Bill Clinton when Newt stole his cheese) and the business climate will improve.

"The Hammer" said...

Maybe, but I doubt it.
There's a couple of things that make me question that. First, everybody thinks Obama is a black Bill Clinton. WTF, is this mass psychosis or something? He wouldn't make a knot on Bill Clinton pecker. Obama doesn't have the political skills, the brains or the love of the job of Bill Clinton. Obama is an ideologue, Clinton was a pragmatist. Clinton was a Democrat from a conservative state and he had lots experience governing in that kind of an environment. Obama has no experience governing in any environment. Plus his crew comes from the Chicago machine; not exactly touchy feely -can't we all just get along- kinda guys.
By virtue of the fact they have pushed through massive, game changing legislation with paper thin majorities, against the will of the people, I have to think they are in no way prepared to work with a Republican majority. It's not in their nature.

Newer Post Older Post Home