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August 11th, 2010 8:28 pm
Conservative Quandry on the Link Between Unemployment Benefits and Job Creation

Everyone except Paul Krugman at least acknowledges that paying for the recently extended unemployment benefits Congress just authorized is a serious issue; even if some consider it outweighed by other concerns.

In addition to increasing the national debt, extending unemployment benefits may also increase unemployment itself.  As Thomas Cooley explains in Forbes, studies show that unemployment benefits can reduce the urgency to find a new job.  However, Cooley mentions another phenomenon that bears further meditation:

Economists Lawrence Katz and Bruce Meyer, in a 1990 study, showed that an increase of one week of benefits increased the duration of unemployment by about 0.2 weeks. Note that some benefits have been extended up to 99 weeks. A back-of-the-envelope calculation means that going from 26 weeks of benefits to 99 would increase unemployment duration by about 14 weeks very close to the increase in duration shown in Figure 3. Recently, however, in a testimony to the Joint Economic Committee (April 29, 2010) the very same Katz said that the effects are small. The difference between the 1990 study and his current finding is that, according to his research, permanent job losses as opposed to temporary layoffs have played a bigger part in this recession. (Emphasis mine)

Unlike Krugman, I’m not one to quibble with logic and empirical data.  But the current unemployment situation is different from the usual circumstance of entities within a sector reshuffling the staff rosters.  Such events cause minor displacements – though not to individual workers and their families – and can be smoothed out when laid off workers find comparable employment in the same or similar industry.

This recession is different.  As the bolded text above shows there appears to be an economy-wide reduction in workforce afoot.  Employers are discovering unknown efficiencies with contingency workers.  In many cases, former full-time, full-benefit workers are being hired back as independent contractors for project work with no benefits.

Once employers get used to getting more production for less compensation, those former full-time, full-benefit jobs won’t be coming back.  That poses a serious quandary for limited government conservatives.  Should government provide a benefits supplement for those working multiple jobs, but still failing to pay the bills, even if it means adding to the deficit?  On the other hand, should benefits be cut to stop the fiscal bleeding with the hope that the former recipients find a way to make ends meet?

Whatever path is chosen, conservatives need to think hard about how to combine stopping the government spending with policies that enable sustainable private sector job creation.

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