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

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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.