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Home Publications Blogs Beat the Press Casey Mulligan's Reality on Unemployment Insurance and Reality for the Rest of Us

Casey Mulligan's Reality on Unemployment Insurance and Reality for the Rest of Us

Thursday, 30 August 2012 05:00

In a blog post yesterday Case Mulligan told readers:

"In reality, cutting unemployment insurance would increase employment, as it would end payments for people who fail to find work and would reduce the cushion provided after layoffs."

Unfortunately Mulligan provides no evidence to back up his version of reality. By contrast, Jesse Rothstein, an economist at Berkeley, looked at the behavior of unemployed workers. He found that at most, the supply-side effect from the extended duration of unemployment benefits in this downturn increased measured unemployment by 0.1-0.5 percentage points. Furthermore, most of this increase was due to keeping workers looking for work and therefore being counted as unemployed. (When a worker stops looking for work, they are no longer counted as being unemployed.)

Rothstein's calculations are only designed to pick up the incentive effect that Mulligan focuses on in his blog post. Since the benefits gave workers tens of billions of dollars that they would not have otherwise, they undoubtedly had a large demand side effect. The Congressional Budget Office estimates the multiplier for unemployment benefits as being 1.6, meaning that the $40 billion a year in extended benefits (roughly the amount at stake) would lead to an increase in GDP of $64 billion or more than 0.4 percent of GDP. If the increase in employment is proportionate, it would imply 560,000 additional jobs. This would swamp the negative supply side effect that Rothstein found in his research.

Comments (14)Add Comment
written by Frederico Lima, August 30, 2012 6:27
Dear Mr. Baker,

Can you tell me the source for CBO unemployment benefit multiplier of 1.6? Thank you very much!
Shorter Casey Mulligan
written by Holden Pattern, August 30, 2012 8:47
The plebes need a taste of the lash, because the lazy lower classes won't do anything unless you beat or starve them into it.
When Unemployment Benefits Exceed Terrible Job Benefits
written by Last Mover, August 30, 2012 10:24
Furthermore, most of this increase [negative supply side effect by Rothstein] was due to keeping workers looking for work and therefore being counted as unemployed.

Even if Mulligan was correct that this effect was much larger, consider the message. Rational workers would be choosing illegitimate unemployment benefits by pretending to seek work because whatever jobs are available pay such miserably low wages and benefits they can't compete even with unemployment benefits.

Mulligan wants existing unemployment rates to be frictional or structural rather than deep sustained cyclical so bad, he keeps hoisting himself onto his own petard with supply side fairy tales that fade into oblivion with the light of day.

When workers loss of unemployment benefits result in leaving the labor force rather than accepting a job, that means the only jobs available can't even pay for things like transporation, day care and meals associated with the job. That's the other side of perfectly rational opportunity costs in the empirical data conveniently ignored by Mulligan.
high hurdle to get off unemployment
written by pete, August 30, 2012 11:51
The unemployed get a check, and get to consume leisure. The marginal value of leisure for most of us workers is pretty high. Hence the old backward bending labor supply curve: you cannot pay me a wage high enough to work 100 hours a week. I would love not to work! So the wage to get an unemployed to work must be enough to overcome not only the unemployment compensation but also the value of leisure (and/or income from underground employment) and maybe daycare. In that sense, lowering unemployment compensation might have some effect on getting folks back to work but not as much as a you might think. A far better solution is a negative income tax, encouraging folks to work even if companies cannot really afford to pay a whole lot. This could be adjusted based on the unemployment rate, i.e., if it creeps up, increase the slope. This way they don't have the stigma of 99 weeks of unemployment, and the issue of trying to explain that hole in the resume.
written by urban legend, August 30, 2012 3:02
There is iron-clad proof of what a flaming idiot Casey Mulligan is: when the jobs were there, as in 2000, those allegedly lazy people TOOK THEM and brought the unemployment rate down to 3.7%. Not only that, but when jobs were available, people too discouraged to work started looking on a regular basis again, and the labor force soared. Unemployment compensation is completely irrelevant to whether people will go to work if they can find a job.

What greater insult could there be than to say those who were laid off could get a job if they were forced to try harder or starve? Is it possible for there to be a bigger public jerk than Casey Mulligan? On what possible basis can the New York Times give him a platform?
Isn't that the fed's job
written by Floccina, August 30, 2012 3:18
they undoubtedly had a large demand side effect.

Isn't demand the fed's job? And if their was less demand through unemployment insurance wouldn't the fed have done more?

NOTE: I am not saying that I am against unemployment insurance.
written by Bloix, August 30, 2012 4:09
"in reality" = an idea I have in my head that does not correspond to anything in the outside world.

This is the standard use of the concept of "reality" among many economists.

We see another example in the comments:

"The unemployed get a check, and get to consume leisure. The marginal value of leisure for most of us workers is pretty high."

Does anyone think that sitting at home - or in your parent's home, or your children's - on a weekday with no money to do anything and the shame of no work is "leisure"? Only an economist would think that.
written by Calgacus, August 30, 2012 4:34
Pete's you cannot pay me a wage high enough to work 100 hours a week.

has a wrong number there. The correct statement is "you cannot pay me a wage high enough to work 170 hours a week."

The Great Mulligan does not go far enough. We should tax the unemployed! $1000 fine for every week of unemployment. A surefire supply side plan!

In a country where someone with Casey Mulligan's intellectual disabilities can get a high-paying job, how could it be that anyone else can't?
written by Jay, August 30, 2012 5:47
Unemployment isn't infinite. Also, I doubt most people want to accept a fraction of their prior wages (presumably not high enough anyway) and having to pay income taxes on less money for an extended period of time. It's easy to put the onus on the victim. People on unemployment are usually fired due to no fault of their own and people are making them out to be free-loaders. Geez. That's cold.
written by skeptonomist, August 30, 2012 7:54
The Fed works on the supply side - it does not do demand. Interest rates have little direct effect on consumers as demonstrated by the absurd rates on credit-card balances. There is actually a positive correlation between rate of increase of mortgage debt and both long- and short-term interest rates since 1952, though it is very weak (R = 0.1 to 0.2). There is also a weak negative correlation between the rate of increase of mortgage debt and the spread between long and short-term rates (R = -0.28).
Talking Points
written by James, August 30, 2012 9:25
Any help like in the form of unemployment benefits to struggling workers and families is called hand-out to lazy people.

Huge tax breaks to some of the most profitable companies (Mobile-Exxon)are called job creating incentive.

Tax breaks to Wall Streets are called faciliating the capital market.

Tax breaks so you could train your horse to compete in Olympics is called "I Can Get Whatever I Want!"
written by lodger16, August 30, 2012 10:09
Radical right wing economics is based on whatever stories sound good to the 1%'ers. It pays well, and facts are so yesterday. What's important is access to the Beltway playpen lifestyle.
to bloix...if leisure had no value we would work a lot more...thats the point...
written by pete, August 31, 2012 2:41
By the way nice NYT article on falling wages for returning workers....The appropriate word I think is capitulation. I.e., the jobs are indeed there, at the appropriate wage, and the nominal wages are actually falling. Exactly what the Keynesian/Neoclassical model would suggest must happen to cure a recession. The goal of Keynesian policy is to drive real wages down to return the labor market to equilibrium. Monetary policy could have done it faster, perhaps, by raising output prices and keeping nominal wages relatively constant, the traditional Keynesian response. Since that wasn't happening, workers are finally take the actual nominal cuts in order to return to work.

Note that since peak income equality in 1968 we have had an average inflation of 4%, huge growth in GDP, and no growth in real wages, and huge growth in inequality. But bring it on!
That ain't Keynes
written by Calgacus, August 31, 2012 7:25
Pete, no that's not at all the goal of Keynesian policy. The goal of Keynesian policy is to have full employment, not to drive down real wages. The primary tool is fiscal policy. The idea that this drives down real wages makes some implicit neoclassical full employment/equilibrium assumption in the first place, which Keynes showed was wrong.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.