Incentives Matter

In the Wall Street Journal today, economist Alan Binder suggests that we should consider extending the already extended 99-week unemployment payouts (extended from a normal of 26 weeks).

If Congress fails to maintain this assistance [i.e. extend the 99-week unemployment payout period], about 1.3 [million] jobless people will lose their benefits at the end of this month. In fact, due to a quirk in the EB formula, some will start losing them even sooner. As the year wears on, that number will rise closer to five million. Isn’t that a serious hole in the safety net?

As I said, extending both the payroll tax cut and the long-term unemployment benefits should be no-brainers under current circumstances.

Yet, Blinder fails to connect the dots in his own column.  Appearing just before those two paragraphs is this one:

In stark contrast with all U.S. experience since the Great Depression, over 42% of today’s unemployed have been jobless for more than 26 weeks. That’s an extraordinarily high number. It means, among other things, that more than 18 million Americans have drawn on the EUC or EB programs since 2008.

Past data and data from other countries show that the unemployed tend to become employed right around the time their unemployment benefits run out.

This is just another version of incentives matter.  Even though most people consider unemployment payouts to be small, many people will do what they can to keep collecting it if they happen to also have a nest egg, severance pay or an off-the-books source of income.  They will also try to hold out for a job that pays them as much as their previous one, even if they have lower paying job options available.  It only pays them to go with the lower paying job when their unemployment benefits run out.

So it’s not surprising, as Blinder points out, that more people have remained unemployed for more than 26 weeks in this recession than in others.  That’s exactly what we’ve encouraged with the unemployment benefits policy.

What is surprising is that an economist like Blinder doesn’t understand that.

5 thoughts on “Incentives Matter

  1. >> “Besides, research by Nobel-prize winning economist James Heckman …”

    Well, Krugman now has a Nobel prize, so that alone is no longer a comfort. 😉

    On unemployment, it amazes me that someone with the credentials Mr. Blinder has can not (or refuses to?) see the cause-effect relationship here. If you offer to pay people not to work, you should not at all be surprised when a large number of people are willing to take you up on the offer. Leisure time is a normal good.

    • Chris – You hit on another passage that bugged me in his column. As if we need research and a Nobel prize winner to tell us that GED’s are worth little in the job market (of course, my guess is they are worth more if you have less experience).

      That’s about like saying, “according to experts and research, green peppers are green and tying your shoes reduces tripping.”

  2. Incentives matter but I do think there is more to this than what your saying. As a recent unemployed worker (thank Thor I just started a new job) I can attest that the problem isn’t just benefits. It’s actually hard to get a job, even when lowering your expectations. I was unemployed since the end of August and I was putting applications everywhere. I has a BS in Chemistry, almost done with a BBA in Management, experience as a supervisor and I was getting no call backs even from Best Buy. Nothing, zero, nada. The only thing I could do was Tutor part time.

    I think we need to look to the root cause. Unemployment benefits are just a government solution to a government created problem.

    • Congrats on the new gig.

      I agree. Unemployment benefits is not a root cause. Another title for the post could have been my oft used, Government begets more government.

  3. Seth:

    Regarding Alan Blinder, note the following:

    “As I said, extending both the payroll tax cut and the long-term unemployment benefits should be no-brainers under current circumstances.”

    Hence if one does not extend unemployment benefits, one has no brain. It is an old debate point of indirectly vilifying opponents and further denies opponents legitimacy.

    As soon as you see that debate stratagem you should immediately leave the realm of economics and enter the realm of “visions” aka the way things ought to be.

    There is no such axiom in economics known as “the way things ought to be”.


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