A Closer Look

The extension of unemployment benefits may also have been a mistake write Becker-Posner

I don’t think there’s much else the government could have done to arrest the depression. Attempts at fundamental economic reform should not be made during a depression, because they create uncertainty, which increases the incentive of businesses and consumers alike to hoard rather than spend; hence the Administration’s health-care reform was mistimed. The extension of unemployment benefits, along with more generous means-tested benefits programs like stamps, may also have been a mistake, by reducing economic pressures on the unemployed to find work. On the other hand, these transfer payments, although an inefficient method of promoting employment (because as I said transfer payments may to a significant extent be saved rather than spent), do increase incomes; and some—probably most—of the increased income is spent, in turn increasing demand for goods and services and so production and employment. Obviously, however, indefinite extension of unemployment benefits cannot be the solution to the unemployment problem.

A depressing possibility is that the depression has accelerated what may be a long-term trend to reduced employment in many industries. Until quite recently, the depression had fostered significant productivity gains, as employers tried to get more work out of fewer workers, as by speeding automation and adopting more efficient personnel management policies. By “accelerating” I mean adopting these measures earlier than they would have done without the spur of falling demand. So the depression may have brought forward inevitable changes in production that will result in reduced employment and earnings. Eventually the displaced workers will find jobs in industries not experiencing the same productivity advances, but the transitional period of high unemployment may be protracted.

The fact that the unemployment rate was less than 5 percent before the depression may refute the suggestion of a long-term decline in employment. But remember that the unemployment rate can be misleading. If we look instead at the percentage of the working-age population that is employed, it has declined from its peak of 67.1 percent in 2000 to 63.6 percent this year—and the decline began before the onset of the depression…


Read More @ Why Unemployment Remains So High—Posner – The Becker-Posner Blog.


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