Paul Krugman, in his December 9 New York Times column, writes, “Ask yourself how, exactly, ending unemployment benefits would create more jobs.”
No one is talking about ending unemployment benefits, they are talking about reducing the duration back to 26 weeks, or 6 months, the standard pre-recession level. One reason for continued unemployment is the panoply of government benefits, including unemployment insurance, now available up to 73 weeks, depending on the state. On average, unemployed Americans can receive 53 weeks of unemployment insurance, double the pre-recession level.
The longer the duration of unemployment benefits, the longer people stay out of work. They turn down low-paying jobs even though they are losing job skills from remaining out of the labor force. The longer they are out of work, the more their skills atrophy. It is a vicious cycle leading to more long-term unemployment.
This research is not “two or more decades old,” as Krugman writes, although such research reaches the same conclusions. It is the subject of recent papers by University of Chicago professor Casey Mulligan, author of The Redistribution Recession, published last year.
Mulligan’s work adds to a body of prior studies by Urban Institute fellow Eugene Steuerle and others that document disincentives to work and even marriage among the poor and middle classes due to phaseouts of multiple benefits. The disabled, who fear the loss of Medicaid, face a particular disincentive to work, according to testimony by Steuerle before a House Committee on Ways and Means hearing in 2012.
Low-income Americans face extraordinarily high marginal tax rates, often well in excess of 40 percent. Each dollar of income for a low-income individual may mean the loss of substantial federal benefits. These losses of benefits are a perverse form of taxation, discouraging poor Americans from finding work and improving their economic condition. Most people are probably unaware that these high marginal tax rates at the bottom discourage labor force participation.
November’s job news was positive. The unemployment rate declined to 7.0 percent in November from 7.3 percent in October, the economy created 203,000 jobs, and the labor force participation rate rose from 62.8 percent to 63 percent.
Congress should use the improving labor market as an opportunity to reconsider eligibility criteria and benefit levels for programs such as unemployment insurance, food stamps, and disability insurance. These programs have ballooned over the past five years, discouraging work. Low-income Americans face a high marginal effective tax rate when they take a job because they have to give up these benefits.
During most recoveries, labor force participation rate eventually rises. Although the recovery began well over four years ago, in June 2009, the labor force participation rate continues at 1978 levels, despite the increase in November. Fewer workers translate into lower economic growth.
Over 9 million adults received disability insurance from the Social Security Administration in October 2013, the latest data available (see table 2). Over 47 million Americans receive benefits from the Supplemental Nutrition Assistance Program (formerly food stamps), Other elements of the federal safety net include mortgage relief, and Temporary Assistance to Needy Families. The provision of subsidized health care for those earning below 400 percent of the poverty line under the Affordable Care Act, beginning in 2014, will exacerbate this.
These programs have expanded in two ways. Eligibility has increased, and the programs have become more generous.
Unemployment insurance is particularly relevant both because it represents a large share of all benefits paid to individuals and because the dramatic extension of unemployment insurance benefits, from 26 weeks to 53 weeks. During the recession, benefits were extended to 99 weeks.
Mulligan calculates that between 2007 and 2010, when the country was in deep recession and gradual recovery, spending on unemployment insurance rose by 293 percent adjusted for inflation. If unemployment eligibility and benefit rules had remained at 2007 levels, spending would have risen by 50 percent.
He explains that when unemployment insurance pays more, "the reward to working declines, because some of the money earned on the job is now available even when not working. Decades of empirical economic research show that the reward to working, as determined by the safety net and other factors, affects how many people work and how many hours they work."
Mulligan estimates that extending the duration of unemployment benefits alone accounted for about one-sixth of the shrinkage of hours worked during that period. He estimates that all benefits taken together explain about half of the decline in the labor force participation rate. The other half is explained by the recession and difficulty of finding a job.
Programs such as unemployment insurance need to be gradually dialed back to pre-recession levels as Americans enter the labor market and find work. That still leaves eligible Americans with 6 months of unemployment insurance benefits. There is no magic formula for exactly how to phase out benefits as income increases, but a good rule of thumb would be to provide incentives for Americans receiving benefits to seek work rather than avoid it. The better-than-expected jobs report for November is a reason to start.
