APRIL 13, 2010.
Incentives Not to Work
Larry Summers v. Senate Democrats on jobless benefits.
"The second way government assistance programs contribute to long-term unemployment is by providing an incentive, and the means, not to work. Each unemployed person has a 'reservation wage'—the minimum wage he or she insists on getting before accepting a job. Unemployment insurance and other social assistance programs increase [the] reservation wage, causing an unemployed person to remain unemployed longer."
Any guess who wrote that? Milton Friedman, perhaps. Simon Legree? Sorry.
Full credit goes to Lawrence H. Summers, the current White House economic adviser, who wrote those sensible words in his chapter on "Unemployment" in the Concise Encyclopedia of Economics, first published in 1999.
Mr. Summers should give a tutorial to the U.S. Senate, which is debating whether to extend unemployment benefits for the fourth time since the recession began in early 2008. The bill pushed by Democrats would extend jobless payments to 99 weeks, or nearly two full years, at a cost of between $7 billion and $10 billion. As Mr. Summers suggests, rarely has there been a clearer case of false policy compassion.
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Associated Press Larry Summers
Mr. Summers is merely reflecting what numerous economic studies have shown. Alan Reynolds of the Cato Institute has found that the average unemployment episode rose from 10 weeks before the recession to 19 weeks after Congress twice previously extended jobless benefits—to 79 from 26 weeks. Even as initial unemployment claims have fallen in recent months, the length of unemployment has risen. Mr. Reynolds estimates that the extensions of unemployment insurance and other federal policies have raised the official jobless rate by nearly two percentage points.
Or consider the Brookings Institution, whose panel on economic activity reported this March that jobless insurance extensions "correspond to between 0.7 and 1.8 percentage points of the 5.5 percentage point increase in the unemployment rate witnessed in the current recession."
Or perhaps the Senate should listen to another Obama Administration economist, Alan Krueger of the Treasury Department, who concluded in a 2008 study that "job search increases sharply in the weeks prior to benefit exhaustion." In other words, many unemployed workers don't start seriously looking for a job until they are about to lose their benefits.
And, sure enough, the share of unemployed workers who don't have a job for more than 26 weeks has steadily increased, reaching a record 44.1% in March. The average spell of unemployment is now 31 weeks, even though the economy is once again creating more new jobs than it is losing. Democrats are slowly converting unemployment insurance into a welfare program.
Despite all of this evidence, Democrats seem to think that extending jobless benefits for another 20 weeks is a big political winner. Iowa Senator Tom Harkin recently roared, "Is there any compassion at all left with Republicans for people whose checks are going to run out?" New York's Chuck Schumer calls Republicans "inhumane."
But do these Senators really think it's compassionate to give people an additional incentive to stay out of the job market, losing crucial skills and contacts? And how politically smart is it for Democrats to embrace policies that keep the jobless rate higher than it would otherwise be? How many Democrats share Mr. Harkin's apparent desire to defend a jobless rate near 9% (today it is 9.7%) in the fall election campaign.
We should add that Republicans would rather not fight on these incentive grounds and are instead opposing the new benefits only because Democrats refuse to pay for them and want to add to the deficit. In other words, the GOP is merely asking Democrats to live up to their own "pay as you go" fiscal promises, since the total bill for these jobless benefits has now hit nearly $90 billion.
If Republicans were really cynical, they'd let the new benefits pass and run against the higher jobless rate in the fall. In any case, no one should be surprised that when you subsidize people for not working, more people will choose not to work.
An earlier WSJ.com version of this editorial contained a quote from the Federal Reserve Open Market Committee's January minutes that was accurate but taken out of context. It was removed during the editing process and wasn't published in the print version of the Wall Street Journal. However, due to a production error, the quote made it into the initial online version of the editorial.
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