Did cutting jobless benefits promote work? Not so much

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What happens to the unemployed in the worst labor market in living memory when their long-term jobless benefits end? Some people, including many Republican lawmakers, had a theory: ending benefits would give the unemployed a nudge. With no more government checks coming, these folks would start looking harder — much harder — for a job or perhaps accept a job they wouldn’t have earlier. This is the logic behind Congress declining this year to renew the federal program funding extended jobless benefits.

Two pieces of evidence suggest this “bootstraps” theory might be wrong. First, a new paper from the Boston Fed paper looking at the Not-So-Great Recovery finds that, yes, the unemployed tended to remain so until their UI benefits were exhausted. But their next move wasn’t into a job. Rather, they became “more likely to drop out of the labor force; transitions to a job appear to be unaffected by UI benefit extensions, ” writes Katharine Bradbury in “Labor Market Transitions and the Availability of Unemployment Insurance.”

Second, economist Justin Wolfers looks at what happened in North Carolina after the state in July last year lost its eligibility for the federal Emergency Unemployment Compensation program. While employment grew over the next six months, it actually grew a bit slower than in neighboring South Carolina, which has a similar economy. After also comparing North Carolina to Georgia and Tennessee, Wolfers concludes, “The bottom line is that North Carolina looks quite similar to its peers, and certainly not better.” Nor has South Carolina performed better than North Carolina this year after the feds cut long-term UI benefits.

One more thing: a new NBER paper, “Positive Externalities of Social Insurance: Unemployment Insurance and Consumer Credit” by Joanne Hsu, David Matsa, and Brian Melzer looks at how jobless benefits affected the mortgage market and find “that Federal expansions of UI helped to avert about 1.4 million foreclosures and $70 billion of housing-related deadweight losses between 2008 and 2012.”

Certainly these analyses aren’t the end of the story. But are they really counter-intuitive in an improving-but-still-weak job market? The US employment rate of 59.0% is still well below its prerecession level. And there are still 3.2 million long-term unemployed vs. 1.3 million in December 2007. It is important to keep people in the labor force looking for work or otherwise risk many of these people, as AEI economist Michael Strain points out, ending up on government assistance until they reach retirement age. (Strain’s “Jobs Agenda for the Right” is still worth a look, as is his chapter in “Room to Grow.”)

It also important to understand how the safety net supported American incomes during the recession and its aftermath. As the Manhattan Institute’s Scott Winship wrote last year, ” … while the middle class—and especially the poor—saw declines in market income after 2007, the safety net appears to have performed just as we would hope, mitigating the losses experienced by households. By 2011, the safety net had returned middle-class and poor households’ incomes to the highest levels ever seen.” And jobless benefits were a key part of that safety net.

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