The Upside of Unemployment

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John Schmitt
The American Prospect, July 31, 2000

To many economists, the unemployment insurance system is, at best, a necessary evil: The system helps laid-off workers survive hard times, but at the cost of economic efficiency. Unemployment benefits, the argument goes, reduce the incentive that unemployed workers have to seek and accept new jobs.

But a new study concludes that the nation's unemployment insurance system may actually improve economic efficiency. Economists Daron Acemoglu, of the Massachusetts Institute of Technology, and Robert Shimer, of Princeton University, argue that financially pressed workers are too quick to take low-skill, low-wage jobs. For the economy to operate at peak efficiency, workers should be investing additional time and effort into finding better-paying jobs that take advantage of their particular skills.

The research suggests that the current unemployment insurance system is too stingy. A modest increase in the system's generosity would raise workers' wages and the overall production of goods and services, according to Acemoglu and Shimer. Moreover, any reductions in unemployment insurance from its present level, the researchers conclude, "would not only decrease the welfare [of the unemployed] but also reduce the level of [economic] output."