Estimated Read Time: 7 minutes
J.P. Morgan released a recent “Economic Research Global Data Watch”
In a heartbeat summary of the report, extended unemployment benefits increase unemployment by 1.5%
To support this point J.P. Morgan writes, “…All told, the maximum available duration of benefits has increased from 39 weeks before the recession to 99 weeks now.”
J.P. Morgan sees two ways that unemployment insurance increases a persons length of time unemployed.
- First, by softening the blow of losing a job, they allow unemployed persons to become more selective in what job offer they accept, thereby raising the average duration of unemployment and increasing the unemployment rate
- Second, they may en-courage people who would otherwise drop out of the labor force to be counted as jobseekers and therefore in the labor force.
J.P. Morgan admits there are many estimates about the effect of UI on increased length of unemployment but it seems most can center around this statistic, “Most estimates of this elasticity have centered on a finding that an increase of one week in the availability of benefits raises the average duration of unemployment by 0.2 week.1″
I want to help you understand this and read the most important portions of the research. If you don’t want the hardline numbers of the data please skip to the bottom and read the Question of the Day.
For J.P. Morgan’s data to find the impact of increased benefits they had to create a baseline amount of time that unemployment generally is allowed to citizens.
To use this estimate to understand how much the unem-ployment rate has been increased by the enactment of emergency benefits, we first need a figure for how many added weeks of benefits are now available. For all states, an additional 34 weeks of benefits are now available. On top of that, another 13 weeks are available in states where the three-month average unemployment rate is above 6%, a threshold that includes over 90% of the population. So we’ll use a figure of 47 weeks of additional benefits as our baseline. (Since an additional six weeks of benefits are available in states where the three-month average unem-ployment rate is above 8.5%, and since Extended Benefits have been increased another seven weeks, our 47 weeks figure could be thought of as near a lower bound.
Using 47 Weeks as the baseline and understanding that 2 new tiers of UI have been created to increase the length of time up to 99 weeks J.P. Morgan states that 4.7 extra weeks of unemployment now exist.
Based on the widely accepted 0.2 estimate of the respon-siveness of average duration to the length of benefit avail-ability, the 47 extra weeks of benefits could be expected to increase average unemployment spells by 9.4 weeks. Since only about half of the unemployed are eligible to receive unemployment benefits (the other half generally have not met the requirements for sufficient prior employment or lost their jobs through layoffs), the total average unemploy-ment duration would be expected to increase by 4.7 weeks.
J.P. Morgan does admit that even cutting unemployment wouldn’t necessarily increase employment by 1.5% but instead only cut unemployment by 1.5%
Because some of this effect may come through sustaining higher labor force participation, the absence of these benefits would not necessarily mean that employment would be 1.5% higher, only that unem-ployment, as measured, would be 1.5% lower.
Many people wonder, “I’ve heard that productivity has increased even though the workforce has decreased and no one is hiring because 1 person does the work of 2 jobs.”
Well that isn’t necessarily true…if you think about the fact that UI is free money but it isn’t much money. So demand is clearly down because of unemployment but those people still have a little money. So demand has dropped but it hasn’t died. The companies are getting order but with credit issues, monthly leases or mortgages & low confidence in the marketplace few employers are looking to hire.
J.P. Morgan points this out in their conclusion:
By increasing the funds available to be spent by the unemployed, higher benefits should stimulate aggregate demand. This logic has been advanced as one of the rationales for increasing unemploy- ment compensation. The differing supply and demand im- plications could be rationalized by higher productivity, which, from the data, is precisely what has occurred.
This it’s a very controversial topic for politicians. It’s not a simple matter for them with this information. This brings me to the…
Question of the Day: If your representative voted against extending UI for your state, would you understand and agree with their choice or would you disagree and try to vote them out?
If you have an job search questions please ask us: Ask the Career Doctor any Question
If you have job search issues please check out iLostMyJob.com – Your Career Transition Resource