Joseph sent me a WSJ article by Stephen Moore:
Consider what happened last week when Laura Meckler of this newspaper dared to ask White House Press Secretary Jay Carney how increasing unemployment insurance “creates jobs.” She received this slap down: “I would expect a reporter from The Wall Street Journal would know this as part of the entrance exam just to get on the paper.”
OK, so Jay Carney is an arrogant jerk. But is that a crime? Many people would say the same about me. The problem is that he isn’t just arrogant, he’s uninformed. Yes, there is a theoretical possibility that UI can lower the unemployment rate, but the evidence suggests just the opposite. See, for example, this essay on unemployment by Larry Summers:
To fully understand unemployment, we must consider the causes of recorded long-term unemployment. Empirical evidence shows that two causes are welfare payments and unemployment insurance. These government assistance programs contribute to long-term unemployment in two ways.
First, government assistance increases the measure of unemployment by prompting people who are not working to claim that they are looking for work even when they are not. The work-registration requirement for welfare recipients, for example, compels people who otherwise would not be considered part of the labor force to register as if they were a part of it. This requirement effectively increases the measure of unemployed in the labor force even though these people are better described as nonemployed—that is, not actively looking for work.
In a study using state data on registrants in Aid to Families with Dependent Children and food stamp programs, my colleague Kim Clark and I found that the work-registration requirement actually increased measured unemployment by about 0.5 to 0.8 percentage points. If this same relationship holds in 2005, this requirement increases the measure of unemployment by 750,000 to 1.2 million people. Without the condition that they look for work, many of these people would not be counted as unemployed. Similarly, unemployment insurance increases the measure of unemployment by inducing people to say that they are job hunting in order to collect benefits.
The second way government assistance programs contribute to long-term unemployment is by providing an incentive, and the means, not to work. Each unemployed person has a “reservation wage”—the minimum wage he or she insists on getting before accepting a job. Unemployment insurance and other social assistance programs increase that reservation wage, causing an unemployed person to remain unemployed longer.
Larry’s right. I’ve seen studies that suggest that extended UI caused the unemployment rate to rise by a half of a percentage point in recent years. It’s hard to believe that even the most fervent Keynesian would claim that the stimulative effects of the UI insurance extension on AD, by itself, would reduce the unemployment rate by 50 basis points. So Carney is almost certainly wrong.
Now let me anticipate some objections:
1. “We are in recession.” But studies show UI causes higher unemployment even in economies with very high cyclical unemployment.
2. “Most of the excess unemployment in the US in recent years is due to a demand shortfall, not UI effects.” I agree.
3. “So you oppose UI?” No, I think we should have an UI program, although I’d favor reforms to make it include at least some personal accounts.