Will extension of unemployment benefits help or hurt the economy

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A set of slides discussing the July 2010 extension of unemployment benefits and its likely effects on the economy

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Will extension of unemployment benefits help or hurt the economy

  1. Free Slides from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Will Extension of Unemployment Benefits Help or Hurt the Economy? Post prepared July 23 2010 Terms of Use: These slides are made available under Creative Commons License Attribution—Share Alike 3.0 . You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics , from BVT Publishers.
  2. Extending Unemployment Benefits <ul><li>On July 22, 2010, President Obama signed a bill extending unemployment benefits from the usual 26 weeks to 99 weeks </li></ul><ul><li>Benefits average around $300 per week </li></ul><ul><li>Questions: </li></ul><ul><ul><li>Why were benefits extended? </li></ul></ul><ul><ul><li>What will be the effects on the job market? </li></ul></ul><ul><ul><li>On balance, will the extension help or hurt the economy? </li></ul></ul>Post P100723 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ We are . . . providing immediate assistance to people who are out there looking for work.  But ultimately, our goal is to make sure the people who are looking for a job can find a job. www.whitehouse.gov . Picture and statement on economy, July 22, 2010
  3. Duration of Unemployment <ul><li>An unusually high number of long-term unemployed is one reason for the push to extend unemployment benefits </li></ul><ul><li>In normal times, relatively few unemployed workers are out of work for 26 weeks or longer, for example, just 16% of at the end of 2006 </li></ul><ul><li>By mid-2010, the percentage of long-term unemployed had risen to 45% of all unemployed workers </li></ul>Post P100723 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
  4. Long-term Unemployment: Historical Comparison <ul><li>Recessions shown by gray bars </li></ul>Post P100723 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Long-term unemployment always rises during and just after a recession, but the increase during the latest recession has been by far the highest for the past 60 years
  5. Unemployment Extension as Social Policy <ul><li>Extension of unemployment benefits is considered by many to be a social policy priority because unemployment disproportionately affects low-income households </li></ul><ul><li>Education also matters. Some selected unemployment rates: </li></ul><ul><ul><li>No High-school degree: 14.6% </li></ul></ul><ul><ul><li>High-school only: 9.7% </li></ul></ul><ul><ul><li>Associate degree: 6.8% </li></ul></ul><ul><ul><li>Bachelor’s degree: 5.2% </li></ul></ul>Post P100723 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
  6. Job Market Effects: Duration of Unemployment <ul><li>By definition, an unemployed worker must be searching for work. Those not working or looking for work are not usually counted in the labor force </li></ul><ul><li>Unemployment benefits lower the opportunity cost of job search </li></ul><ul><li>International comparisons suggest that increasing either the duration of unemployment benefits or the replacement ratio tends to increase unemployment, especially long-term unemployment </li></ul>Post P100723 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Vertical scale shows ratio of benefit to previous wage in first year of unemployment. Horizontal scale is artificial; higher number shows longer duration, but not measured in years. Number in box shows percentage of long-term unemployed among all unemployed. Data source: OECD
  7. Basic Job Search Model <ul><li>At the beginning of job search, worker sets a reservation wage— the lowest wage at which a job will be accepted </li></ul><ul><li>Possible jobs are discovered sequentially and at random </li></ul><ul><li>Worker accepts first job that meets or exceeds reservation wage </li></ul><ul><li>Reservation wage will decrease over time as savings are used up and new information makes ideas about available jobs more realistic </li></ul>Post P100723 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
  8. Effect of Reservation Wage on Unemployment <ul><li>Worker 1 with higher reservation wage schedule R1 searches longer than worker 2 with reservation wage schedule R2 </li></ul><ul><li>Implication: A higher reservation wage means longer average duration of unemployment, and therefore a higher average unemployment rate </li></ul>Post P100723 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
  9. Effects of Unemployment Benefits on Job Search <ul><li>Unemployment benefits paid for D weeks raise the reservation wage schedule from R1 to R2, causing worker to continue searching longer than without benefits </li></ul><ul><li>Reservation wage begins to drop rapidly after benefits expire as savings are used up and opportunity cost of search rises </li></ul><ul><li>Implication: Higher or longer benefits raise average duration and rate of unemployment </li></ul>Post P100723 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
  10. Do Benefits Help or Harm the Job Market? <ul><li>By itself, a longer period out of work before finding a job is good for the labor market </li></ul><ul><li>However, by allowing workers to search more carefully, unemployment benefits may result in better matching of workers to jobs, thereby improving labor market efficiency </li></ul><ul><li>For that reason, governments usually provide job information, training, and incentives to search along with unemployment payments </li></ul>Post P100723 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Photo source: http://commons.wikimedia.org/wiki/File:FEMA_-_29783_-_Workers_unemployed_by_the_freeze_in_California.jpg
  11. Macroeconomic Effects <ul><li>In the short run, unemployment benefits support consumer spending by unemployed workers </li></ul><ul><ul><li>Consumer spending helps boost aggregate demand </li></ul></ul><ul><ul><li>Other things being equal, that can speed recovery from recession </li></ul></ul><ul><li>On the down side, higher unemployment benefits complicate the essential long-term task of controlling the government’s debt and deficit </li></ul>Post P100723 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
  12. The Bottom Line <ul><li>Extension of benefits will help some of the neediest of the unemployed </li></ul><ul><li>Extended benefits will likely slow any drop in long-term unemployment </li></ul><ul><li>Lower opportunity cost of job search may help match workers to jobs </li></ul><ul><li>Extension of benefits will have a positive short-term stimulus effect </li></ul><ul><li>The added cost of extended benefits will complicate the long-term job of controlling the deficit an debt </li></ul>Post P100723 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Testifying before Congress on July 22, Fed Chairman Ben Bernanke called unemployment “our most important problem” and favored maintaining moderate fiscal stimulus for the time being

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