Obama’s 2014 War on the PoorPosted: January 2, 2014 Filed under: Economics, Mediasphere, Politics, Think Tank, White House | Tags: Cato Institute, Concise Encyclopedia of Economics, David Card, David Neumark, Martin Feldstein, National Bureau of Economic Research, Unemployment benefits, United States 4 Comments
More unemployment benefits and a higher minimum wage? Couldn’t be worse for struggling Americans
Michael Tanner writes: To put it in today’s standard D.C. terms, Democrats sure must hate poor people.
That’s silly, of course. But there’s no doubt that Democrats are preparing to push policies that are likely to hurt struggling low- and middle-income Americans.
Both the Obama administration and the Democratic leadership in Congress have announced that their top priority when Congress returns later this month will be extending unemployment benefits and raising the minimum wage. Both policies are likely to leave more Americans jobless — especially low-income workers with few skills, the very people Democrats claim they want to help most.
Take the extension of unemployment insurance. Labor economists may disagree on the extent to which unemployment benefits increase or extend spells of unemployment, but the fact that they increase the duration of unemployment and/or unemployment levels is not especially controversial. As Martin Feldstein and Daniel Altman have pointed out, “the most obvious and most thoroughly researched effect of the existing UI systems on unemployment is the increase in the duration of the unemployment spells.”
In fact, even Paul Krugman, in the days when he was an actual economist rather than a partisan polemicist, wrote in his economics textbook:
Public policy designed to help workers who lose their jobs can lead to structural unemployment as an unintended side effect. . . . In other countries, particularly in Europe, benefits are more generous and last longer. The drawback to this generosity is that it reduces a worker’s incentive to quickly find a new job. Generous unemployment benefits in some European countries are widely believed to be one of the main causes of “Eurosclerosis,” the persistent high unemployment that affects a number of European countries.
President Obama’s former Treasury secretary Larry Summers estimated in The Concise Encyclopedia of Economics that “the existence of unemployment insurance almost doubles the number of unemployment spells lasting more than three months.”
It’s not hard to understand why. Incentives matter. Workers are less likely to look for work or accept less than ideal jobs as long as they are protected from the full consequences of being unemployed. That is not to say that anyone is getting rich off unemployment or that unemployed people are lazy. It’s just simple human nature that people are a little less motivated as long as there is a check coming in. Indeed, research shows that, in the weeks just before benefits run out, workers spend more hours looking for a job and are as much as three times more likely to find jobs.
Of course, one should be careful not to overstate the effect — the overall impact on unemployment is likely to be modest. Studies suggest that the 2009 extension of unemployment benefits to 99 weeks, for example, raised the unemployment rate by 0.5 to 1.5 percentage points.
Still, that’s hardly good news. And those most likely to suffer from extending this policy are the long-term unemployed. The longer a worker stays unemployed, the more his skills deteriorate. By extending the period spent without a job, extending benefits makes it less likely that an unemployed worker will eventually find a job, and reduces the workers’ wages when they do find work. And low-income workers, with limited skills and frequent spells of unemployment, may find this a particular problem.
The second part of this one-two punch against employment is an increase in the minimum wage. Again, the overwhelming consensus among economists is that an increase in the minimum wage reduces available employment. In fairness, that consensus is not unanimous: Some studies, notably one by Princeton’s Alan Krueger and Berkeley’s David Card, suggest that at least small increases in the minimum wage have little or no impact on employment. But other economists have criticized the methodology of that study, and a comprehensive review of more than 100 papers on the minimum wage, by David Neumark and William Wascher for the National Bureau of Economic Research, found that 85 percent of them showed negative employment effects…
— Michael Tanner is a senior fellow at the Cato Institute and author of Leviathan on the Right: How Big-Government Conservatism Brought Down the Republican Revolution.
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