The Unassuming Economist

A new report from the U.S. Congress Joint Economic Committee (JEC) finds that if federal UI benefits are allowed to expire, over 2 million long‐term unemployed workers stand to lose their benefits in early 2012. That number could grow to 5 million before the end of 2012.

Entitled “The Case for Maintaining Unemployment Insurance: Supporting Workers and Strengthening the Economy,” the report finds that at 3.7 percent, the current long-term unemployment rate is nearly three times higher than it has ever been when Congress let federal benefits expire.

“Unemployment benefits serve as a critical lifeline to workers and their families in the face of a sudden and severe drop in income,” said Senator Bob Casey, Chairman of the JEC. “These benefits help struggling families pay for their necessities such as food, housing, clothing, and utilities—obligations that continue even when a family member loses a job.”

On average these benefits only meet half of basic household expenditures but they kept over 3 million Americans out of poverty in 2010. Research shows that extending federal UI benefits during periods of high unemployment works to pull the economy back from a downward spiral whereby reduced consumer demand leads to further reductions in economic activity, and that in turn leads to more job losses.

“Continuing the current emergency federal UI programs is vital to the economic recovery. A temporary reauthorization would not only give millions of struggling long-term unemployed Americans a lifeline, it would bolster the economic recovery by generating jobs and accelerating economic growth. Washington must put aside partisan bickering and give American families the help they need to stay on their feet,” said Casey.

Report highlights include:

• Over 40 percent of the unemployed have been without a job for at least six months, and over 30 percent have been unemployed for at least one year. Letting emergency federal benefits expire now would be unprecedented and could derail the recovery.

• Even without lengthening the maximum allowable duration of benefits, continuing federal benefits could generate up to 400,000 jobs. The boost to the economy from additional spending on UI benefits is estimated to be as large as $1.90 for each dollar of assistance—the greatest “bang-for-the-buck” among a range of fiscal policies designed to boost gross domestic product (GDP) and create jobs, according to the non-partisan Congressional Budget Office (CBO).

• Claims that extended UI benefits deter unemployed workers from looking for work are unfounded. On the contrary, beneficiaries of federal UI benefits have spent more time searching for work than those who were ineligible for UI benefits. Studies find the impact of additional benefits on the unemployment rate to be small. 

• Any increase in the unemployment rate because of federal UI benefits is most likely because the beneficiaries remain attached to the labor force and continue to search for work, not because they refuse employment or do not search for a job.

During times of fiscal austerity, income inequality goes up. Inequality goes up more when the austerity comes about through spending cuts than through tax hikes. The income share of the richest 1% of the population increases after fiscal austerity. Those are the main findings of a new paper by Luca Agnello and Ricardo Sousa.

The paper adds to a growing, but still scant, literature on how fiscal austerity affects different segments of the population. My paper with Larry Ball of Johns Hopkins University and my IMF colleague Daniel Leigh [available here] shows that fiscal austerity lowers incomes—hitting wage-earners more than others—and raises unemployment, particularly long-term unemployment. These costs must be balanced against the potential longer-term benefits that consolidation can confer.

See the discussion of this work by Paul Krugman, Washington Post and Huffington Post here.

Agnello and Sousa note that their results are “close in spirit” to the evidence of Ball, Leigh and Loungani that “fiscal consolidation reduces the wage share in total income. The authors suggest that, while the fall in wage income is persistent, the fall in capital and property income is short-lived. This can be explained by the fact that fiscal austerity plans typically call for a fall in public sector wages or lead to an increase in unemployment (in particular, long-term unemployment)” (p. 10, Agnello and Sousa).

ILO says world heading for a new and deeper jobs recession, warns of more social unrest, in its annual World of Work Report.

In a seminar at the IMF, Tom Sargent said that when he was in graduate school at Harvard in the 1960s, low European unemployment rates “were viewed as a great success and envied” by Americans. John Kennedy’s May 1961 speech to the U.S. Congress, famous today for its rhetoric about the space race (“this nation should commit itself to . . . launching a man on the moon and returning him safely to earth”), was in fact concerned largely with matters much closer to home. First and foremost on the U.S. president’s mind was his country’s high unemployment: “Large-scale unemployment during a recession is bad enough, but large-scale unemployment during a period of prosperity would be intolerable.” The 1970’s and 1980’s, however, saw a reversal in fortunes as European unemployment rates shot up dramatically. Sargent’s seminar examined why this reversal in fortunes came about. Today, as fears are being expressed about America’s labor market becoming Euro-scelerotic, Sargent’s work on unemployment remains highly relevant. 

In Lost Decades, Jeffry Frieden and Menzie Chinn argue that fiscal consolidation is a necessary prerequisite for long term recovery; however, “fiscal consolidation too soon can derail the recovery, and plunge us further into debt. In contrast, some commentators have asserted that fiscal consolidation can be accomplished painlessly, or even with immediate benefits (e.g., JEC-Republicans, Rep. Paul Ryan/Heritage Foundation). Recent empirical work which carefully identifies the relevant episodes concludes that such instances of expansionary fiscal contraction are rare, and usually conducted near full employment.” Ball, Leigh and Loungani review the effects of fiscal contraction in “Painful Medicine“.

Read the rest of the story on Econbrowser.