Comments on: Bad economics from McArdle!?

By: pushmedia1

pushmedia1 — Thu, 22 Oct 2009 16:47:57 +0000

Chris, you can take the UI money and give it to the unemployed without making it contingent on finding a job. This way you deal with the welfare issue but you don’t give disincentive to find work.

By: Chris

Chris — Thu, 22 Oct 2009 16:26:47 +0000

I think that Megan’s result is based on the idea that the unemployed, especially the poorer among them, are constrained somehow in credit markets, so giving them money while they’re unemployed will encourage them to shift consumption to current periods. This is an empirical question as to how large the effect might be. At the very least it will remove a fair amount of risk from the loss of income, so it might be a good idea welfare-wise, to the extent that people are simply risk averse.

By: pushmedia1

pushmedia1 — Thu, 22 Oct 2009 15:15:08 +0000

I’m not aware of any model that has that prediction and most empirics I’ve seen finds negative effects of UI controlling for the level of unemployment.

By: Megan McArdle

Megan McArdle — Thu, 22 Oct 2009 13:18:11 +0000

It matters when you extend the benefits. At this point, anyone who is taking a job quickly rather than waiting around for the perfect job is not noticeably reducing the friction in the labor markets, because jobs are being net destroyed. Taking a job means that you’re unemployed for a week less, but with two few jobs to go around, it means someone else is unemployed for a week longer.

As unemployment regresses to the natural rate, frictional/structural unemployment dominates cyclical unemployment, and providing more unemployment benefits does indeed lengthen unemployment.

By: pushmedia1

pushmedia1 — Thu, 22 Oct 2009 06:17:46 +0000

As usual, my arithmetic was wrong and qualitatively so… the study I mentioned suggests unemployment in today’s environment would be increased by about 1/2 a percent by increasing UI 13 weeks (as is being contemplated in congress).

UPDATE: see the update to the main post on these calculations. Does anyone report hazard rates implied from the JOLTS surveys?

By: pushmedia1

pushmedia1 — Thu, 22 Oct 2009 04:33:47 +0000

Mike, what you say is true. The theory has the macro variables in there (if you think unemployed workers produce externalities in their searching for other unemployed workers), but the UI variable is in there too. Holding the macro variables constant, UI increases unemployment.

I’m not convinced the effect size is a rounding error. Studies I’ve read have shown significant effects of extending UI benefits. (An “experiment” in New Jersey suggested increasing UI length by 50% increases the number of long-term unemployed by 7% and increases the average unemployment spell by a week… 1.5% in unemployment percentage points if I’ve got my math right). They’ve estimated these effects controlling for the level of unemployment and their sample contained the nasty early 80’s recessions.

By: Mike

Mike — Thu, 22 Oct 2009 03:49:08 +0000

Also, fwiw, “Food services and drinking places” sector is down jobs YTD, which is 45% fast food, 45% restaurants. I wonder how that looks underneath, because restaurants are taking a bath in ‘09 but fast food stocks have been on a tear with the economy in the toilet, as everyone wanting to get as many calories for $1. (Is a Big Mac giffen?)

I assume there are more, perhaps even a lot more, jobs at McDonalds than there were before – but would a former executive with a college degree be a shoe-in for the hire? Or would there be a bizarre adverse selection from the POV of Mayor McCheese?

By: Mike

Mike — Thu, 22 Oct 2009 03:30:59 +0000

I think what Megan is saying is that, given that the number of unemployed people per job offering has tripled in the past year and a half as a result of the business cycle, the high unemployment effect’s on the likelihood of pulling a job from the job bucket, and an agent’s expectation of that being rough throughout 2010, dominates the worker’s decision to the point where adverse incentives from UI is a rounding error. Or at least that’s my take when the discussion is brought up.

I assume the agent’s expectation of the job value function has to have broad variables for numbers of others searching (high) in the denominator and number of firms hiring (low) in the numerator that move with the business cycle – or is it a magic bucket of jobs? – but I’m not there yet.