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November 26, 2012

Congress Should Heed Paul Krugman on Unemployment Benefits

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As Congress ramps up its negotiations over the fiscal cliff and impending tax hikes, left-wing groups have taken to the Hill to lobby lawmakers for an extension in unemployment benefits, despite evidence that such an extension could prolong the country’s years-long joblessness spell.

The National Employment Law Project and other left-wing groups dispatched members to Capitol Hill during the first week of the lame duck session of Congress to press for a UE extension. They found a potential ally in Sen. Charles Schumer (D-N.Y.), The Hill reported.

Conservatives looking to combat the effort can find their talking points in some unlikely places: the academic works of both the White House’s top economic advisor and one of the left’s most celebrated economic minds.

Opposition to an extension of unemployment benefits centers on a simple truth: if you pay people to do something, they generally do more of it. Remove that financial incentive, and one’s willingness to cope with even painful circumstances will be reduced.

But don’t take conservatives’ word for it. “Public policy designed to help workers who lose their jobs can lead to structural unemployment as an unintended side effect,” explained Nobel Laureate and New York Times columnist Paul Krugman in his 2009 textbook, Macroeconomics.

“In other countries, particularly in Europe, benefits are more generous and last longer,” Krugman added. “The drawback to this generosity is that it reduces a worker’s incentive to quickly find a new job. Generous unemployment benefits in some European countries are widely believed to be one of the main causes of ‘Eurosclerosis,’ the persistent high unemployment that affects a number of European countries.”

(Krugman would, only a year later, dub the notion that UE benefits prolong joblessness, reiterated by Sen. Jon Kyl (R-AZ), “a bizarre point of view.” But then an academic study has found Krugman to be the nation’s most partisan economist.)

Even the White House’s top economic advisor has noted the drawbacks of prolonged unemployment benefits. Alan Krueger, chairman of the White House Council of Economic Advisors, co-authored a 2002 study in the Handbook of Public Economics that found that those benefits “tend to increase the length of time employees spend out of work.”

Krueger’s paper laid out the incentives inherent in benefits for the unemployed. “[I]ncreases in either the level or potential duration of benefits raise the value of being unemployed, reducing search intensity and increasing the reservation wage,” the study found.

More generous unemployment benefits, in other words, reduce the incentive to find employment. “Higher and longer duration UI benefits,” the paper adds, “will cause unemployed workers who receive UI to take longer to find a new job.”

Workers who are not eligible for unemployment benefits or who have approached or reached the maximum duration of benefits, on the other hand, are more likely to search for, and hence to find work, according to Krueger. The study found an increase in the “escape rate from unemployment for workers who currently do not qualify for benefits and for qualified workers close to when benefits are exhausted.” Krueger called this the “entitlement effect.”

Much of the data supporting an extension of unemployment benefits is based on the supposedly simulative effect of money in the pockets of the unemployed. But because the incentives inherent in the program are harder to quantify, the economic benefits of letting them expire may not be clear.

Ironically, conservatives looking to end those incentives can look to some of the left’s leading economic minds for arguments against their extension.

Lachlan Markay is an investigative reporter for The Heritage Foundation.

First appeared in Daily Caller.

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