Asymmetrical Information - Megan McArdle

04.24.13

Did The Government Cause Our Long-Term Unemployment Problem?

Generous unemployment benefits. Excessive taxes and regulation. Are we voters to blame for the current job market?

On Monday, I wrote about long-term unemployment, and why it's a large enough problem that the federal government should be trying to do something about it.  I got pushback along two lines:  

1.  Extended unemployment benefits probably caused the unemployment, by giving people an incentive to stay home instead of finding a job.  

2.  Regulations and taxes are making it too hard to hire people.  

I am sympathetic to the basics of each argument.  Regulations and taxes do make it hard to grow a business and create new jobs, a point I made in my last post.  And extended unemployment benefits do give people an incentive to stay home instead of finding a job.  Indeed, I know people who have done just that.  One of them wrote a novel that sold for a bunch of money and earned back all the benefits they'd collected, and then some.  The rest of them basically sat around and did nothing until their benefits ran out, and then found another job.

However, I don't see these as viable explanaitons for the current employment situation.  Regulations and taxes did not suddenly spike in the fourth quarter of 2008, but unemployment did.  And while Obamacare certainly imposes taxes and uncertainty on businesses, I don't think that it, by itself, can have driven the natural rate of unemployment up by 3-5 percentage points.

So what about unemployment benefits?  I find this argument even less convincing.  Again, I believe that there are people on unemployment who are just milking the system--believe it because I have met people who told me that this is what they were doing.  But I do not believe that this accounts for anything like the bulk of the unemployment problem.  

To see why, lets look at JOLTS, a data series from the Bureau of Labor Statistics which tracks job openings and turnover.  What we see is not employers clamoring to hire people who would rather be home on the couch.  Instead, we see that the ratio of job seekers to job openings spikes at the beginning of 2009, and has remained elevated ever since.  It's improved, to be sure, but by now, we've improved to--the peak level of the last recession.

If that's not depressing enough, consider this: the ratio of job seekers to job openings would be even higher, except that a bunch of people have simply dropped out of the labor market.  

Extended unemployment benefits do not explain this.  That's a story for why people aren't hiring, not why they aren't creating job openings in the first place.  

Oh, you can tell a very complicated story where extended unemployment benefits make people wait too long to find a job, and then employers don't want them, and the employers can't find anyone except long-term unemployed people they don't want to hire, so they pull out of the labor market.  But I don't find this story very plausible.  For one thing, it's a very complicated chain of events.  When your story relies on five different steps to be true, then it's pretty likely to be false.  

Moreover, we know from research that labor scarring is nearly complete by 6 months--that is, that by six months on the job market, you've damaged your chances of re-employment in the current job market so severely that the remaining incremental damage accrues pretty slowly.  

But six months is the current length of standard unemployment benefits.  And if standard unemployment benefits cause very high long-term unemployment rates, how come they only started doing so in 2009?

To sum up, unemployment benefits do cause some moral hazard, and taxes and regulation probably do somewhat depress the natural rate of employment in our country.  But neither are an adequate explanation for the truly devastating conditions in the current labor market.  Which means that--as much as I would love it to be true--we can't fix them by slashing taxes, regulation, and government spending.