Unemployment pay increases unemployment

One of the sadder things I've seen over the past few years has come from a coterie of left leaning US economists. They have been insisting that the extension of unemployment benefits (usually in the US they are only payable for 26 weeks, it was extended to 99) has had no effect on the unemployment rate. This is of course untrue:

Extending the maximum length of benefits beyond 26 weeks made highly educated unemployed people “more ‘relaxed’ and more patient in selecting jobs,” wrote Lei Fang and Jun Nie in a new working paper, “Human Capital Dynamics and the U.S. Labor Market.” Had unemployment benefits not been extended, they estimated, “the unemployment rate during the 2010-2012 period would have been 0.5 percentage point lower than the actual level.”

The full paper is here.

The high U.S. unemployment rate after the Great Recession is usually considered to be a result of changes in factors influencing either the demand side or the supply side of the labor market. However, no matter what factors have caused the changes in the unemployment rate, these factors should have influenced workers’ and firms’ decisions. Therefore, it is important to take into account workers’ endogenous responses to changes in various factors when seeking to understand how these factors affect the unemployment rate. To address this issue, we estimate a Mortensen-Pissarides style of labor-market matching model with endogenous separation decisions and stochastic changes in workers’ human capital. We study how agents’ endogenous choices vary with changes in the exogenous shocks and changes in labor-market policy in the context of human capital dynamics. We reach four main findings. First, once workers have accounted for and are able to optimally respond to possible human capital loss, the unemployment rate in an economy with human capital loss during unemployment will not be higher than in an economy with no human capital loss. The reason is that the increase in the unemployment rate led by human capital loss is more than offset by workers’ endogenous responses to prevent them from being unemployed. Second, human capital accumulation on the job is more important than human capital loss during unemployment for both the unemployment rate and output. Third, workers’ endogenous separation rates will decline when job-finding rates fall. Fourth, taking into account the endogenous responses, unemployment insurance extensions contributed 0.5 percentage point to the increase in the aggregate unemployment rate in the 2008–12 period.

There really shouldn't be any surprise at all about this as Richard Layard has been pointing out for decades now:

There is ample evidence that unemployment (and employment) is affected by how the unemployed are treated. Other things equal, countries that offer unemployment benefits of long duration have more unemployment (and less employment). This is because employment depends on the effective supply of labour.

Extending the period of time for which unemployment benefits are paid is quite obviously going to increase the amount of unemployment that there is.

This does not, in any manner, mean that those benefits should not have been extended. It's entirely possible, for example, to claim that the pain and grief prevented by the extension is greater than that caused by that uptick in the unemployment rate caused by it. It's possible to make the opposite argument as well and your conclusion should at least depend upon a combination of your priors and the evidence put in front of you.

But my complaint is that that certain set of economists has been ludly proclaiming to the world that the extension cannot increase unemployment. Therefore no one has been working with the correct facts about the problem under discussion. And I'm afraid that I regard that as more than a little sad. Yes, I know, I'm just showing how naive I am even at my advanced age: but I really would prefer it that professional knowledge was deployed as professional knowledge, not twisted to feed the rabble in politics.