Did 4.3 Million People Reject a Job and Stay on Unemployment Instead?

Unemployment benefits
Unemployment benefits

Government-funded unemployment insurance payments have probably kept millions of people from living on the streets and starving during this recession. So naturally, jobless benefits are to blame for the high unemployment rate. Or so argues Harvard professor Robert Barro in The Wall Street Journal. JPMorgan Chase (JPM) issued a similar analysis in March 2010. Still, that logic isn't persuasive -- although it's popular among those who would like to roll back the U.S. to the way it was before FDR.

Barro argues that unemployment insurance makes people turn down job offers so they can sit on their couches all day collecting money from the government. More specifically, he argues that if the government cut off unemployment insurance after 26 weeks instead of extending it to the current 99, the jobless rate would be 6.8% instead of 9.5%. And if that were the case, he suggests, the party in power would face happier results in the upcoming midterm elections.

"Almost Surely the Culprit"

Why does Barro believe this? It's certainly not because he can cite any examples of people who have turned down jobs because they got an extension of their measly $385 a week in unemployment insurance (the maximum in Illinois). Why would anyone turn down an average job in Illinois that pays $1,264.70 a week (the 2009 median Illinois family income of $66,806 divided by 52 weeks) and the prospect of a longer-term income to receive 30% of that private wage in an unemployment check that's sure to stop coming at some point?

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In a nutshell, Barro believes that were it not for extended unemployment benefits, this recession would have been only as bad as previous post World War II recessions in terms of how many months people were unemployed and what proportion of them were out of jobs for over half a year. As he wrote, "the dramatic expansion of unemployment-insurance eligibility to 99 weeks is almost surely the culprit."

But he doesn't seem to consider other factors that can explain the much longer time people need to find jobs in the current recession -- like the financial crisis, the massive economic overhang of foreclosures, the great reluctance of companies to invest their $1.84 trillion worth of cash in job-creating investments or consumers' reluctance to spend more than they take in.

  1. Barro concludes that extended unemployment insurance must be the only reason. To arrive at the 6.8% jobless figure, you have to follow an elaborate chain of mathematical sophistry. Here's Barro's methodology: Estimate the median number of months and share of total unemployed workers accounted for by so-called long-term unemployed in previous recessions. His estimate was 21 weeks and 24.5%, respectively.

  2. Find the median number of months and share of total unemployed workers accounted for by the long-term unemployed in the current recession as of June 2010. He came up with 35.2 weeks and 46.2%.

  3. Estimate (out of thin air) the total number of unemployed workers there would have been in June 2010 if the share of long-term unemployed had been at the post World War II average, 24.5%, instead of the actual 46.2%. Barro calculated this figure as 10.4 million -- 4.3 million less than the actual figure.

  4. Divide the hypothetical number of unemployed by the 153.7 million-person workforce to arrive at what he thinks the unemployment rate would be if unemployment insurance had been cut off at 26 weeks -- 6.8%, instead of the actual 9.5% rate.

Barro provides no reason to think that the 4.3 million difference between his hypothetical number of unemployed and the actual number can be explained by the extra 73 weeks' worth of unemployment insurance. But if he can produce testimony from 4.3 million people who turned down jobs because they were still collecting unemployment or 4.3 million offer letters from companies who've had unemployed workers reject their job offers, I'll gladly stand corrected.