Jobless benefits raise unemployment by less than thought, study finds

Lawmakers in Congress are preparing for battle on several fronts as they weigh President Obama's jobs plan--and one of the likely sticking points will be the administration's request to further extend unemployment benefits, which are scheduled to expire at the end of the year.

The White House argues that with economic growth faltering and unemployment above 9 percent, the benefits don't just provide a lifeline to millions of struggling Americans; they also offer a fast and effective way to jolt the economy. That's because recipients have little choice but to spend them quickly, rather than saving them, so they're rapidly dispersed into the economy's bloodstream. But Republicans have been lukewarm about the idea, with some contending that jobless benefits increase unemployment, by reducing the incentives for recipients to find work. (Indeed, the GOP appears eager to fundamentally overhaul the unemployment benefits system by tying it more closely to work.)

That's why a new study (pdf) about the impact of jobless benefits on employment comes at a crucial time. Jesse Rothstein, an economics professor at the University of California, Berkeley, used a sophisticated statistical analysis to conclude that extensions of benefits had a "significant but small" effect on the unemployment rate, by deterring the unemployed from looking for work.

How small? Rothstein, who previously served as a top economist in the Obama White House and Labor Department, found that the various extensions of jobless benefits enacted during the current downturn raised the unemployment rate by around 0.2 to 0.6 percentage points. By our back-of-the envelope calculations, that translates to somewhere between 310,000 and 930,000 jobs.

But hold on! Rothstein says that half or more of this effect is thanks to "reduced labor force exit among the unemployed rather than to the changes in re-employment rates." What does that mean? In plain English, unemployment benefits can exert a perverse pressure to keep job-seekers counted in the ranks of the jobless.

To continue to receive benefits, you're required to keep searching. So some people who would otherwise have grown discouraged and stopped looking for work continue to do so in order to receive benefits. That has the effect of artificially raising the official unemployment rate--since once you stop searching for a job, you're no longer counted in the official rate. But this pattern of lingering nonparticipation in the workforce doesn't mean there are more people without a job.

So once you exclude those people, you're left with perhaps around 300,000 people who would have jobs were it not for unemployment benefits creating an incentive of sorts to remain out of work. That's not nothing, but as Rothstein notes, the magnitude of this drag on the unemployment rate is "much less than is implied by previous analyses."

A key followup question, which Rothstein's study isn't designed to address, is whether that small impact is outweighed by the positive effect of jobless benefits in stimulating the economy. That's a hard question to answer, because it involves comparing a micro-economic impact (i.e., benefits causing people to look less hard for work) to a macro-economic impact (i.e., recipients quickly spending benefits and thereby triggering increased economic activity).

According to at least one analyst, Rob Valletta, an economist at the San Francisco Fed--who, as it happens, is acknowledged in the footnotes of Rothstein's paper -- the latter effect outweighs the former, as The Lookout reported earlier this year. Valetta argues that more jobs are created via the economic gains of disbursing jobless benefits than are lost by the way that the benefits may prolong the time that jobless Americans are not employed. And Valletta was assuming that the impact on personal behavior was around twice as large as Rothstein's study found.

Of course, all of these calculations also do not address the human benefit of continuing to offer a lifeline to Americans who are struggling.

What does all this mean? On one level, another academic study--especially by a former Obama administration economist--isn't likely to convince many Republicans to switch their stance on extending benefits. But should Congress ever wrestle with the unemployment crisis as something other than a question of partisan politics, Rothstein's data could be an important reality check.