Bad economics from McArdle!?

I know. I know. I’m thinking I misunderstood her in some way. She says:

When the unemployment rate is up around the 10% line, the problem is not people waiting around for perfection; it’s that there aren’t any jobs for them to take. Increasing peoples’ incentive to take a job offer will not do anything to increase the number of job offers; at best, you’re just shuffling the unemployment around some. Indeed, at a time when aggregate demand has collapsed, more generous unemployment benefits could plausibly make the unemployment rate lower.

The way I parse this paragraph — and I’m very suspicious of my parser given what its forcing me to conclude — she’s saying the labor supply curves for the unemployed don’t slope up and she’s saying UI is a more efficient policy than straight transfers (the alternative policy to UI) or normal aggregate demand policy.

Let me first state the obvious: because there are few job openings out there, doesn’t mean there are no job openings. Can we all please get aboard the marginal analysis bus?

Consider the decisions an unemployed person has to make regarding finding a new job. He must decide how hard to work at finding a new job and he must decide which job offers to take. Now, I have a very loose definition of job offer. The help wanted poster outside McDonald’s is very likely a job offer even though no one explicitly offered the job to the unemployed person. The harder he looks for a job the more implicit and explicit offers he will get.

Working backwards in time: will the unemployed worker be less likely to take a random job offer if UI benefits increase? Yes because the cost of taking that random job offer goes up as he has to give up more UI benefits.

Will the unemployed worker search less hard due to increases in UI? If he has no control of the quality of offers he gets (which is likely given the loose definition of a job offer), because random job offers are less likely to be taken, the expected benefits of searching are reduced. Looking harder for new jobs, for example, will produce more offers but those offers are, on average, worth less. With the same cost (loss of leisure time and searching for jobs is a pain in the neck) but less benefits, he’ll reduce his search effort.

How would either of these decisions depend on the business cycle?

(It would be interesting to see if people in their last week of UI benefits find jobs at higher rates than the rest of the unemployed. This is true in “normal” times, but I wonder if its true now.)

The increase in UI is inefficient because if you gave that money to the unemployed person but didn’t make that payment contingent on finding a job, you’d have more people employed quicker, thus more production, with the same cost of the policy. If you’re trying to manage aggregate demand, UI is a terrible policy instrument.

UPDATE: In comments I mention a study by Card and friends that used a UI extension in New Jersey as an experiment to see its the effect on unemployment. They find extending UI by 13 weeks increases average unemployment durations by a week and increases the number of chronically unemployed by 7%. I messed up the calculation to see what this translates to in unemployment percentage points. The answer, as it turns out, is very sensitive the separation and hire rates (the percentage of the employed that become unemployed and the percentage of unemployed who become employed). In normal times, these are about 1.3% per month and 28% per month respectively. The Fed says unemployment duration is about 26 weeks as of last month. This suggests a hire rate of 15%. You can infer the separation rate if you assume we’re in the steady-state (alarm bells!). Anyway, if you plug in the “normal times” separation rates (1.3%), you get about 1.5% additional unemployment from the UI extensions and if you plug in the implied rates using steady-state assumptions (1.6%) you get 0.2% additional unemployment from UI extensions. A big range.