Casey Mulligan Has Another Head Scratcher On Unemployment Insurance

In his Economix post today Casey Mulligan asks the question of whether unemployment benefits on net create jobs. He tells readers that:

"Even if unemployment insurance did not discourage a single person from working, the net effect of the program on hiring can be positive or negative, depending on the labor intensity of the goods and services that the unemployed buy, compared with the labor intensity of the goods and services that those who pay for unemployment do not buy."

There is a problem in this story and it has to do with timing. The people who pay for unemployment insurance (UI) are in fact the same as the people who receive it. It is paid for as deduction from wages. The issue is not a difference in consumption patterns between the payers and receivers, the issue is the timing of the benefits.

At the point in a business cycle where large numbers of people are receiving benefits (like now) the UI system will be running a deficit. This allows unemployed workers to receive benefits, which they will overwhelmingly spend, without an offsetting current payment from other workers. This means that there is no matching deduction from the demand of workers who are still employed.

Over time, there may be offsetting increases in the contribution for unemployment insurance, depending on whether the program is financed in a way that ensures that it is a self-financed system. (We can also have a Ricardian equivalence story whereby other taxes would be increased to make up a shortfall in the UI system.) That can lead to lower consumption at future times.

However, there is not a plausble story whereby workers would reduce consumption today by an amount equal to the additional spending allowed by the payment of unemployment benefits. Therefore we don't have to investigate the relative labor intensity of the items purchased by UI beneficiaries and non-beneficiaries as Mulligan suggests.

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written by skeptonomist, February 15, 2012 12:36

Mulligan's analysis seems to imply a strange kind of integration over time (borrowing today is futile because you have to pay it back tomorrow), but also it implies that money cannot be either created or destroyed and that the quantity in use is always ideal. In principle a modern central bank or government could just print money and give it to unemployed people, without the necessity for anyone to pay for it directly (of course the Fed does not really do this - its helicopters are imaginary and it has to create money through bank borrowing). Mulligan's economy seems to be a medieval affair where trade is conducted with gold only and there is no borrowing. Of course this may be what Ron Paul has in mind.

head scratcher?
written by El Foley, February 15, 2012 1:52

I read that in Economix and was completely dismayed. I must be reading much Baker, Thoma, Krugman and DeLong over the last two years. Then I saw he was teaching at U. of Chicago. Is he not embarrassed to write such crap?

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written by diesel, February 15, 2012 2:10

"Oh, somewhere in this favored land the sun is shining bright;
The band is playing somewhere, and somewhere hearts are light,
And somewhere men are laughing, and somewhere children shout;
But there is no joy in Mudville — mighty Casey has struck out."

or, ...
written by David, February 15, 2012 3:04

Give Mulligan a mulligan and let him replay the shot. The lie of the original was terrible, and a lie.

Therefore we don't have to investigate the relative labor intensity of the items purchased by UI beneficiaries and non-beneficiaries as Mulligan suggests.

That is a pretty amazing oversight for a full professor at supposedly one of the best economics schools in the country. [sarcasm] On the other hand, who better suited to do such an investigation (with full pay) than Casey Mulligan? [/sarcasm]

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written by sherparick, February 15, 2012 3:37

Has Professor Mulligan published any literature, or cited any published literature, that would support his contention that UI is a bad idea? I note that in other contexts, (the celebration of the explosion of credit and financial engineering over the last 30 years) that freshwater, DSGE, RBC, economists like Mulligan have celebrated "borrowing" as "smoothing out consumption" for individuals at the start of their working career who "rationally" expect higher incomes during the later stage of their working careers. Since UI is actually a kind of insurance that workers pay into, is it not another mechanism for "smoothing out consumption."

Just as a technical matter, if there was evidence of crowding out in the credit market (rising interest rates) or inflation spreading into the labor market, then Mulligan might have a point. But at the moment, taxes are being collected at lowest % rate since WWII of national income, so I don't know how anyone's current consumption or proclivity to invest is being affected by extending UI.

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written by Kai B, February 16, 2012 12:14

I live in Idaho, and employers pay for UI in this state. But I'm pretty sure it's a federal law. You should check into this DB.

Two imponderables in the discussion come to mind
written by Bill H, February 16, 2012 12:23

First is that UI withholding is paid, as Kai points out, by the employer, but the claim is made that it is an offset against wages and so is actually paid by the employee. That is, wages would be higher if the employer was not paying that "benefit." I think the point is arguable, but...

The other is a question as to whether the writer was actually talking about unemployment benefits rather than unemployment insurance. The latter, funded by payroll tax, lasts only 26 weeks, and then the former kicks in which is funded from general tax revenue. No one can pretend in any way that the employee pays for that. It is not actualy unemployment insurance, but is very often called that, even by President Obama. If it was this benefit he was talking about then his discussion would be valid, whether his points were or not.

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written by reason, February 16, 2012 3:25

Kai B
Yawn,
incidence is not the same as liability. UI may be technically paid by employers, but it comes out of net wages. Employers worry about the total cost of an employee not just the nominal wage.

Nothing imponderable
written by Robert Weiler, February 16, 2012 10:56

Mulligan is simply wrong. Unemployment benefits being paid out today are being funded not from current general revenue but rather by the federal government which is borrowing the money at negative real interest rates. At some point in the future, that money will need to be paid back through higher taxes, but there is no need to do so while interest rates remain low and millions of people remain unemployed.

Is Casey Mulligan an economist?
written by Hugh Sansom, February 17, 2012 12:46

You'd be hard-pressed to find any evidence of knowledge of economics is his writing. He sounds more like a computer programmed to use the language of Chicago School color-by-numbers, square-pegs-into-round-holes automatons. No thought, no critical effort, no self-examination. Nothing.

Casey Mulligan Has Another Head Scratcher On Unemployment Insurance

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