Saturday, December 28, 2013

Unemployment Benefits Subsidize Unemployment

One proverb that is often quoted by personal finance advisers warning people not to get taken in by the false economy of cheap but shabby products is you get what you pay for. Alas, the same is true in the realm of economic policy, especially when we consider government subsidies. As I explain in Foundations of Economics, subsidies are direct cash transfer payments from the government to citizens. A foundational economic principle as it applies to public policy is that we get more of whatever we subsidize.

This weekend's news is full of stories about 1.3 million Americans losing their emergency unemployment benefits today. This certainly will be a hardship for those who have been arranging their spending banking on receiving those benefits. That fact of the matter, however, is that we get more of what we subsidize. That is what the latest research indicates about unemployment benefits. Unemployment benefits tend to draw more people into the official labor force, so the are eligible for benefits and then encourage potential workers to delay their accepting employment by decreasing the opportunity cost of not working.

When North Carolina cut off emergency benefits last July, the State's unemployment rate declined noticeably faster than the official nation wide unemployment rate. J.P. Morgan Economist Michael Feroli reports the following:
In July, the North Carolina government decided to no longer offer extended benefits, even though the state still met the economic conditions to qualify for this federal program. Since July, the North Carolina unemployment rate has fallen 1.5%-points; in the same period the national unemployment rate has fallen 0.4%-point.

 This analysis is not an attempt to establish my cold-hearted, hard-nosed economist bona fides, but is instead simply reminding the reader of how things are. It is not charitable to allow people to be led astray by wishful thinking.

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