Two anecdotes and a complaint.

By Scott Sumner.

Here’s a couple anecdotes I’ve heard about unemployment insurance:

1. A couple years ago a commenter mentioned the following story from someone who ran a hotel in California. A dozen or so maids were laid off during the recession. After a few months the owner tried to hire them back. They declined, saying that with their husband’s income and their unemployment insurance checks they found they didn’t need the second income. But note; if they were collecting UI then they would be required to call themselves “unemployed.”

2. A few days ago an acquaintance mentioned that he heard the following story from a Chicago taxi driver. He said it was hard to keep drivers, because they’d work for a few months and then go collect UI.

How are we to react to stories like these? Are they apocryphal? After all, you can’t collect UI if you quit your job. Except you can, I’ve known people who did so. Are they not politically correct? Do they represent “blaming the victim?” (Something I’ve been doing a lot recently.)

OK, here’s my complaint. I don’t like the way progressive bloggers talk about this issue, for all sorts of reasons (which have nothing to do with ideology–I’m not hostile to their policy views.) There’s a suggestion that anyone who talks about the disincentive effects of UI is somehow either clueless or cold-hearted. Maybe that’s true of some, but there are all sorts of reasons to take this issue very seriously. And suggesting UI has effects on employment is not the same thing as calling unemployed people “lazy.” Consider the following:

1. The statistical evidence on UI is overwhelming significant. When the UI benefits maxed out at 26 weeks, there was a spike in the number re-employed right after the benefits ran out. That’s not to say the benefits are necessarily inefficient, if the spike was due to the income effect then UI might actually make the job market more efficient. But it’s hard to dispute the fact that UI insurance does have some effect on labor supply. And that means some effect on employment, as studies show that the effects on unemployment duration even occur in areas with double digit unemployment.

2. Many Western European countries such as France saw their natural rates of unemployment rise from around 2% in the 1960s to about 10% in the 1980s. We don’t know all the reasons, but the most plausible explanations have to do with various labor market policies. Progressives have NEVER come up with a plausible explanation for this sharp rise in the European natural rate of unemployment. Until they do they have no business calling out conservatives who warn that the same thing could happen here.

3. Denmark recently found that their four year maximum on UI benefits was distorting the labor market, and cut the maximum duration to 2 years. Denmark is arguably the most progressive, most civic-minded country on Earth. Were they just imagining this problem? Were the policymakers over there hypnotized by Casey Mulligan?

4. Both liberals and conservatives seem prejudiced against the proletariat, but in slightly different ways. Some conservatives seem to think the unemployed are lazy, not willing to work hard. This outrages liberals, but I find their defense of the unemployed to be just as offensive. They seem to concede that if UI did increase unemployment, then the accusation of “laziness” would be valid. That’s easy to say if you have a nice, cushy, interesting white collar job that pays well.

I used to do various construction jobs like painting and roofing. It’s work I can do. Suppose I lost my six figure job and was offered a job paying $20,000 a year doing roofing. Would I take it? No, I’m too “lazy.” I’d keep collecting those UI checks and keep looking. Now consider those lucky hotel maids that were offered jobs paying something like $20,000 for the privilege of cleaning toilets and watching naked IMF chiefs parade around. And let’s assume they didn’t need the money because their husband had a job and they were also getting UI checks. And maybe they had kids they wanted to spend time with. How’s their decision any different from mine? Don’t we all follow self-interest? How does all this moralizing advance the positive issue of how many people are unemployed due to the 99 week UI maximum.

I don’t think anyone claims it’s the reason for all unemployment—large numbers of unemployed don’t even collect UI insurance. My guess is that around 1 out of every 100 Americans are current unemployed due to extended UI and higher minimum wage rates. Casey Mulligan seems to think it’s 2 or 3 out of 100. I think that’s too high, that AD is still a big problem. But we ought to be able to have a civil debate without descending into personal attacks. It’s an empirical question, and until we understand it that way we won’t be able to make sensible policy judgments. My hunch is that the Danes have already reached this understanding.

Now for a curve ball. I’m not calling for less UI right now. I’d like to see more monetary stimulus, and then gradually reduce the maximum UI benefits as jobs become more available. So I have “progressive” views on the AD question. But just because AD matters doesn’t mean AS stops mattering, no matter what the new-old Keynesian models tell us, and no matter how squeamish we are about talking about the issue.

In the long run we should reform UI to give workers more “skin in the game” (and idea progressives seem to hate.) If it’s going to worsen inequality, then accompany it with actions that make the payroll tax more progressive.