The Folly of Subsidising Unemployment

The Obama administration's policy of expanding unemployment-insurance eligibility to as much as 99 weeks from the standard 26 weeks has been detrimental to the jobs recovery, says Robert Barro, an economics professor at Harvard University and a senior fellow at Stanford University's Hoover Institution.

To begin with a historical perspective, in the 1982 recession the peak unemployment rate of 10.8 per cent in November-December 1982 corresponded to a mean duration of unemployment of 17.6 weeks and a share of long-term unemployment (those unemployed more than 26 weeks) of 20.4 per cent, says Barro:

Long-term unemployment peaked later, in July 1983, when the unemployment rate had fallen to 9.4 per cent.

At that point, the mean duration of unemployment reached 21.2 weeks and the share of long-term unemployment was 24.5 per cent.

These numbers are the highest observed in the post-World War II period until recently, thus, we can think of previous recessions (including those in 2001, 1990-91 and before 1982) as featuring a mean duration of unemployment of less than 21 weeks and a share of long-term unemployment of less than 25 per cent. These numbers provide a stark contrast with joblessness today, says Barro:

The peak unemployment rate of 10.1 per cent in October 2009 corresponded to a mean duration of unemployment of 27.2 weeks and a share of long-term unemployment of 36 per cent.

The duration of unemployment peaked (thus far) at 35.2 weeks in June 2010, when the share of long-term unemployment in the total reached a remarkable 46.2 per cent.

These numbers are way above the ceilings of 21 weeks and 25 per cent share applicable to previous post-World War II recessions.

The dramatic expansion of unemployment insurance eligibility to 99 weeks is almost surely the culprit, says Barro.

To get a rough quantitative estimate of the implications for the unemployment rate, suppose that the expansion of unemployment insurance coverage to 99 weeks had not occurred and the share of long-term unemployment had equalled the peak value of 24.5 per cent observed in July 1983.

Then, if the number of unemployed 26 weeks or less in June 2010 had still equalled the observed value of 7.9 million, the total number of unemployed would have been 10.4 million rather than 14.6 million.

If the labour force still equalled the observed value (153.7 million), the unemployment rate would have been 6.8 per cent rather than 9.5 per cent, says Barro.

Source: Robert Barro, The Folly of Subsidizing Unemployment, Wall Street Journal, August 30, 2010.

For text: http://online.wsj.com/article/SB10001424052748703959704575454431457720188.html

For more on Economic Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=17

First published by the National Center for Policy Analysis, United States

FMF Policy Bulletin/ 07 September 2010