A reader writes in, having just heard somebody or other claim that the current unemployment rate would be much lower if unemployment benefits were even less generous, and asks whether this can be true. And the answer is no. People who say things like this are fundamentally confused about what the economic research actually means.
Here’s what is true: there’s respectable research — e.g., here — suggesting that unemployment benefits make workers more choosy in the search process. It’s not that workers decide to live a life of ease on a fraction of their previous wage; it’s that they become more willing to take the risk of being unemployed for an extra week while looking for a better job.
What this means, in turn, is that UI may raise the “full employment” level of unemployment — the level at which labor shortages start to appear, wages start an upward spiral, and inflation becomes a potential problem. Since the Fed raises interest rates when it sees signs of inflation, there is a sense in which UI raises unemployment on average over the business cycle.
But all of this is totally irrelevant to our current situation, where inflation is running below target, the target is too low anyway, and the reason we have mass unemployment is that there just isn’t enough demand, and hence there just aren’t enough jobs, no matter how desperately people search for them.
Chosen excerpts by Job Market Monitor
via Unemployment Benefits and Actual Unemployment: An Analogy – NYTimes.com.
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