Tag Archives: unemployment benefits

Early signals point to unemployment trouble

In January, I wrote a post that supported shortening the unemployment benefits for the long-term unemployed. I used data from North Carolina to show a 1.4% drop in the unemployment rate in just six months. Unfortunately, analytics website Five Thirty Eight published an article from their data lab today that tells a different story.

Since the end of the Emergency Unemployment Compensation program cut unemployment benefits for many Americans three months ago, those whose checks have stopped coming still aren’t finding jobs. In my own analysis of the North Carolina data, I noted that one potential red flag was the high percentage (3/4 of a percent) who dropped out of the workforce altogether. The unemployed who become discouraged and quit trying to find work cause the biggest flaw with the unemployment measure, causing a counter-cyclical movement against the unemployment rate. That drop-out red flag seems to be a larger driver of the overall rate than we’d hoped.

“The number is much smaller today not because the long-term unemployed, as these Americans are defined by the Labor Department, have found jobs, but because they have given up looking for work.”
-Ben Casselman, Five Thirty Eight

These data’s prognosis isn’t good. In essence, Five Thirty Eight’s data lab has found that after six months, your chances of finding a permanent job are close to “hopeless.” Those who are finding employment are accepting part-time or temporary work.

Casselman also has an interesting take on how policy will react in the coming years and in the next recession. While there have been mixed reviews about how to interpret the Fed’s unemployment target, it seems like it will continue to serve as an indicator to some extent. The Fed’s 6.5% threshold seemingly has been reached, and scaling back stimulation into the economy has already garnered speculation for the first interest rate increases in years. For those who have dropped out of the workforce or yet to find employment, the future looks bleak.

“The Fed has been pulling back on its efforts to stimulate the economy, despite continued high unemployment and low inflation, suggesting it thinks the long-term unemployed are gone for good.”
-Casselman

It’s hard to pinpoint how to manage the long-term employment situation in America. On one hand, it isn’t possible to continuing paying out benefits forever to millions without jobs. Yet, this three month data shows hints that it isn’t a lack of effort preventing Americans from the workforce. The chances of finding work quickly diminish after six months unemployed, so the first step is ramping up the efforts to get laid-off workers going right out of the gate. Additionally, hiring long-term unemployed to government jobs such as infrastructure projects or creating easier access to community volunteering opportunities can help prospective employees keep their resume fresh and full of work experiences.

Don’t Blame Baby Boomers

Recent discussion on the extension of extended unemployment benefit has always brought the debate on whether the unemployment insurance itself might be one of reasons for the lousy payroll numbers since the recession ended. If we look at the civilian employment to population ratio, it looks like this:

Civilian employment to population 16 years or older ratio.

Civilian employment to population 16 years or older ratio.

The point I want to make from this graph is obvious. The right tail depicting the ratio since the recession is pretty much flat for 4 years. Where do you see this flat period in this graph? During early 1960’s is the only period other than the current which saw the flat ratio. In fact, every other recession the U.S. has seen since the great depression is followed by a jump in the civilian employment to labor ratio. Can we blame the extended unemployment benefit and other benefits like food stamp for this stagnant civilian employment to population ratio? My answer is yes if we look at the aggregate benefits went to the unemployed, not just only the unemployment insurance.

Now the interesting part comes in. The current period coincides with the first wave of retirements of baby boomers. Therefore, one might blame baby boomer for this low employment to population ratio. That makes sense since there are more people are retiring every year than previous periods when the baby boomers were employed. However, if we do little bit of hand calculation, we can see the babe boomers aren’t flattening our curve!

According to study, starting 2011, 10,000 baby boomers has been retiring every day. This trends will continue for the next 19 years. This means every month there are around 300,000 baby boomers are retiring. If we look at births per year before the baby boom, it was roughly around 2,750,000 per year. On the other hand, during the baby boom, the rate was average 4,000,000 birth per year. If we adjust the baby boom to find out what the retirement rate would be in the absence of baby boom, there would be 3125 less people everyday retiring. That totals to around 100,000 less people would retire every month today if the World War hadn’t happened and there had been less reproduction in the U.S. after the war.

If we draw the above graph adjusting the number of retirement to the baby boom, the above graph would look like this:

The civilian employment to population ratio adjusted for baby boomer retirement

The civilian employment to population ratio adjusted for baby boomer retirement

If we look at the adjusted graph, we can clearly say that the baby boomers aren’t really causing the flat curve in our graph. So what could be causing this flat tail?

People who argue that the extended unemployment insurance after the recession has been a cause of motivation of otherwise employed people to extend their unemployment period. The statement that an unemployed person voluntarily stays unemployed when they receive unemployment benefit might sound very unpopular. Who want to stay at home when their children are hungry, right? But this question is very simplified.

If we look at the changes made to unemployment insurance and benefits. the total effect of these benefits is not trivial on the behavior of unemployed people. After the recession the policymakers eased the qualification for the unemployment insurance by not requiring anymore an unemployed person to be employed before the recession. Other changes like food stamps extended the number of people who are getting the unemployment benefits.

The recent article in the WSJ writes what recent research has found out of the effect of the extended unemployment insurance. The article says:

One of the findings by Ms. Fang, an economist at the Atlanta Fed, and Mr. Nie, an economist at the Federal Reserve Bank of Kansas City, in their paper was that extended benefits kept the unemployment rate higher than it otherwise would have been, especially for more-educated workers.

Moreover, their other finding is, according to the article :

Economic output was depressed because fewer people were working, but extended benefits also increased labor productivity because they “allowed unemployed workers to be more patient in selecting jobs” and find better matches, the economists wrote.

That is an interesting finding. Since if someone is having some economic assistance during unemployed period, he or she will have more incentive to find as the best suited job as possible for their skill and experience. Even though finding better matched job is definitely better for an unemployed individual, it is not very good for the whole economy. Remember, fallacy of composition? In fact, this could be a root reason for current unemployment condition.

 

Interpreting the Drop in the Unemployment Rate

As the U.S. economic recovery picks up momentum, the Federal Reserve must make decisions about when to raise interest rates. According to the Wall Street Journal, “If [Janet Yellen] and her colleagues wait too long, they could fuel high inflation or financial bubbles; if they move too soon, they could damp a recovery that is just gaining steam”. The decision of when to raise interest rates is dependent on the state of the U.S. economic recovery and an important indicator of the recovery is the unemployment rate, which has been steadily declining.

Janet Yellen, who will be replacing Ben Bernanke, must be careful when interpreting the fall in the unemployment rate. According to the Wall Street Journal, “[Janet Yellen] and other Fed officials worry [the unemployment rate] masks large pockets of stress still plaguing the labor market, including millions of people who want to work but aren’t looking anymore and therefore are no longer counted as unemployed”. The December employment report indicated that the unemployment rate was 6.7%, but the 0.3% drop was largely due to a falling labor-force-participation rate. Normally, a falling unemployment rate indicates a strengthening economy. However, in this situation the falling unemployment rate is due to signs of a weak labor market where people who want to work cannot find jobs.

For this reason, I am a strong supporter of keeping short-term interest rates lower for longer. The declining unemployment rate is not a reason to be delighted about the U.S. economy as it is being pushed by the labor-force-participation rate. However, I also like to consider myself an inflation hawk. Thus, keeping rates low when the economy picks up steam is not something that I want to see. This is a tricky decision, but I have much faith in Yellen.

Upcoming this Friday is another employment report, which will provide an updated unemployment rate. The unemployment rate has been steadily declining and some think this trend will continue. According to the Wall Street Journal, “Friday’s jobs report could very well show the U.S. unemployment rate fell again in January – this time perhaps in part because federal jobless benefits have ended”. The unemployment rate is already near the Fed’s threshold of 6.5% and another decline could push it below the Fed’s threshold. At this point, the Fed has stated they will consider raising interest rates. Not only does this put pressure on Yellen and other Fed officials to make a decision on when to raise interest rates, but financial markets will likely begin speculating about how soon the Fed will raise rates. As a result, there might be increased volatility in financial markets unless the Fed can provide clear forward guidance.

If upcoming employment report shows a declining unemployment rate, then one explanation might be the expiration of federal unemployment benefits. This could cause the unemployment rate to fall for two reasons. First, people might stop looking for work without unemployment benefits. According to the Wall Street Journal, “Some job seekers will give up the search when they run out of benefits, research suggests. To get state jobless benefits – and federal benefits when they were in effect – recipients have to keep applying for jobs. Some who believe they face long odds finding a job may figure it is still worth the effort if they are receiving the benefits…”. Therefore, without benefits some people might give up their search. If this actually takes place, then I would not be surprised if Congress tried to renew the unemployment benefits. Second, people might take jobs that they would not have taken if unemployment benefits continued. According to the Wall Street Journal, “Others will find a job, perhaps because they are more willing to take one that pays less than they wanted”. In this case, people are actually taking jobs rather than becoming discouraged workers. In both cases, the unemployment rate will fall.

I am curious what the upcoming employment report will show. I think it is an especially important report because it is the first one since the surprisingly weak December report. If this report is weak again, then it might mean the December report was not an outlier (as many people are hoping).

A case for shortening unemployment benefits

As the United States government struggled last summer to compromise on how to decrease expenditures without causing further damage to the fragile economy, unemployment benefits were targeted. Many states made cuts in the amounts paid out, while others passed grandfathering policies that only would affect the newly-claiming jobless. In North Carolina, however, the federal unemployment program ended, and the duration of jobless aid decreased from seventy three weeks to just twenty weeks (the state’s policy) at the start of 2014. For many, that meant still being without a job and now without any sort of check.

The story here are the results since the news broke in July of last year, and it may come as a surprise. North Carolina’s unemployment rate has dropped almost 1.5 percent, from 8.8 to 7.4. The realistic view is that once the unemployed are forced to find work to survive, the decreased unemployment number makes sense. When the checks stop coming for those who have relied on it for up to seventy three months, it’s time to put the nose to the grindstone and find some sort of work.

The drop in the unemployment rate does have an asterisk of sorts. That comes in the form of the large number that have dropped out of the North Carolina workforce in the same span. The workforce has decreased by about 3/4 of a percent, which is evidence that many have just given up. Yet, the workforce percentage has been dropping across the board in all of America. Whether it is over a year or in about four months, individuals need to decide whether they will take a lower paying job or quit trying to find one. Even taking the percentage who dropped out into consideration, by cutting benefits down to 1/3 of what they were, North Carolina has spurred about a 1% decrease in unemployment in six months.

I don’t mean to show a lack of compassion in this post. In fact, the New York Times article that I first read about the North Carolina situation in tells the story of Ms. Alnetta McKnight, who has struggled to find work since losing her job last year. Ms. McKnight shows no signs of laziness, as she has applied to 150 jobs with no luck. Her family has been forced to make many sacrifices as she tries to provide for her family without a paycheck. However, I believe the data tells a compelling story. If almost 1/9 of the jobless have found work since the policy changes (and this was before their checks were actually cut off) there is a good chance more unemployed take action now that their checks have actually stopped coming. Unemployment benefits are an essential part of the federal budget, and are necessary to help during the phase of finding a new job. However, there must be a limit placed to prevent free-riding on another hard-working American’s money. In this case, I think North Carolina got it right.

 

Featured Articles:

Lowrey, Annie, “States cutting weeks of aid to the jobless,” The New York Times. January 21, 2014. Link

Luhby, Tami, “Why the unemployed are seeing smaller checks,” CNN Money. June 7, 2013. Link

Infographic on individual states’ cuts: Link

Should the Unemployment Benefits Program be Extended?

The disappointing figure of 74,000 job increases last month was definitely a big shock to many economists who are optimistic about the market. The misunderstandings of the market signals and the vulnerability of the economy in front of extreme weather discredit the promising recovery theories proposed by these experts and once again cause heated discussion over unemployment benefits. Some people from Democrats hold the opinions that the unemployment benefits should be extended much longer if the job market does not recover well enough.

It seems that expending the unemployment benefits might be the most direct way to help the jobless to get though current difficulties. However, Congress should not make this decision hurriedly without concerning about its long-term effects.

This first reason why benefits should not be extended is that it could affect the motivation of unemployed people. Currently, a jobless man could receive 26 weeks of state benefits. After that he could turn to federal emergency unemployment compensation and get at supports up to 47 weeks. Unemployed people in New York even to get a 20-weeks extended benefits (http://money.cnn.com/2012/11/29/news/economy/unemployment-benefits-cost/). If the jobless are well supported by unemployment benefits, some of them might lose their will for finding jobs or give up easily when they feel frustrating. In this case, the benefits just help jobless people overcome the short-term difficulties and leave a potential problem unsolved.

Moreover, the unemployment benefits might make the unemployment rate imprecise. It was very strange to see that the unemployment rate decreased to 6.7% while the job increases was surprisingly low last month. If we take a deeper look at the data, we might find that the decrease of unemployment rate was partly because many jobless people just stopped looking for jobs and left the labor force last month. The labor force participation rate was 62.8%, which is near the lowest in 35 years (http://blogs.wsj.com/five-things/2014/01/10/5-takeaways-from-december-employment-report/). The unemployment benefits might cause the unemployed people to stop looking for jobs, leading to a lower labor force participation rate. Thus, the total number of unemployed workers who are willing to work decreases, causing the unemployment rate to drop.

Also, the cost of unemployment benefits is huge. According to a Congressional Budget Office report, state and federal unemployment benefits programs have cost about 520 billion dollars and extending the program for a year would cost another 30 billion dollars. However, the Congress might spend this amount of money on training unemployment people and help them be prepared when the job market gets better.

In sum, the debates over unemployment benefits between Democrats and Republicans would be continued and the government should not only look at the short-term effects but also the long-term effects of the program before making any decisions.

 

 

 

 

The “Free Lunch” Fallacy

Harvard Economist Robert Barro has an article in the Wall Street Journal attacking the concept of a Keynesian multiplier (which he discusses in the context of unemployment benefits):

The [Obama] Administration claims that every $1 of jobless benefits creates $1.80 in economic growth, based on the notorious “multiplier” in Keynesian economic models. This is the theory that you can increase employment by paying more people not to work, and that you can take money out of the private economy by taxes or borrowing without cost.

He goes on to refer to the Keynesian multiplier as a “supposed free lunch.”

I won’t argue here about the effects of unemployment benefits on labor market participation (Paul Krugman has already covered that with particular shrillness), but I thought I’d weigh in on why, exactly, Barro is wrong about Keynesian multipliers in general.

First, I cannot think of any Keynesian who would claim that funding Keynesian stimulus with taxes and borrowing comes without cost. Keynesian theory suggests that we pay for more consumption today by consuming less tomorrow. I don’t know what else to say; the cost is clear and explicit. Whether future consumption is adequately sacrificed is another matter, but the theory behind the justification of Keynesian stimulus does indeed necessitate costs. It’s called business-cycle smoothing, and you learn it in first principles: you borrow in the bad times and pay for that borrowing in the good.

Barro also expresses disdain for the idea that you can generate $1.80 worth of economic benefit by inserting $1.00 into the economy. The basic intuition, which I’m sure Barro understands, goes like this: the government gives you a dollar, and you spend a certain fraction of it, and that becomes someone else’s income, who spends a certain fraction of what they got from you, and so on. Eventually, all of that spending adds up to more than the dollar you put into the economy. People like Barro see this as getting something from nothing — how, after all, can you get more out of a system than you put into it? But that’s not exactly what’s going on.

Imagine a field in which there are hundreds of sticks of dynamite laid out in a line. You light the wick of the first stick (and safely find cover!). What happens? The first stick explodes, causing the next stick to explode, causing the next stick to explode, and so on. Have you gotten more out of the system than you put into it? Of course not — the energy that causes all of the explosions were there all along, they were just laying dormant before they were “stimulated.”

Economies work in much the same way. Call it animal spirits, call it fear, call it an inadequate supply of liquidity circulating through the economy, but sometimes the “energy” in the economy lies dormant. If you insert a dollar into an economy and get $1.80 worth of economic activity out of it, that extra $0.80 did not come out of thin air; it always had the potential to be realized, but the economy was not sufficiently utilizing all of its resources to reap that benefit.

And you don’t have to like the intuition behind multipliers for them to be greater than 1: many empirical studies confirm it.

So, yes, you can generate $1.80 worth of benefit by inserting $1.00 into the economy, but, no, it is not without cost, and I don’t think anyone is claiming that it is.