Study: Enhanced Unemployment Benefits Enhanced Unemployment

Incentives matter. All of the political grandstanding, media spin and wishful thinking won’t change this basic economic principle.

Both Janet Yellen and Joe Biden insisted “enhanced” unemployment benefits weren’t incentivizing people not to work. But as we recently reported, analysis of continuing unemployment claims after a number of red states cut enhanced benefits undermined this narrative. Now a study by Mercatus Center economists Michael Farren and Christopher M. Kaiser further destroys the ludicrous notion that paying people not to work won’t result in fewer people working.

In a nutshell, according to the study, states that ended participation in enhanced federal benefits early saw two times the job growth compared with states that kept the program in place.

My hot-off-the-presses research:
Federal UI benefits likely reduced job growth.
The states which ended participation in federal programs early showed 2x the job growth relative to the states which kept the programs in place through this week.https://t.co/QpCWnuDd5T

— Michael D. Farren (@MichaelDFarren) September 3, 2021

Our preliminary results agree with the findings of previous research: the parameter estimates show that higher UI benefits tend to discourage employment, whereas the end of UI eligibility appears to motivate more workers to become employed. “

In their paper, Farren and Kaiser begin by explaining the incentivizing effect of enhanced unemployment benefits.

The concern that the federal expansions to UI reduce the likelihood that workers will return to employment is based on the understanding that unconditional monetary grants to unemployed workers tend to raise their reservation wage—the compensation level necessary for the worker to take a job. UI programs are typically designed to mitigate this potential effect by replacing only a portion of workers’ preunemployment income (up to some income limit). However, the additional weekly benefits provided by FPUC (as well as the American Rescue Plan’s exemption of $10,200 of UI benefits from federal income tax) means that many low-wage workers saw no decrease in their weekly income (and some even saw an increase).”

Farren and Kaiser also outline a number of empirical studies that support this conclusion. As just one example, economists Johannes F. Schmieder and Till von Watcher reviewed 13 studies examining the effect of benefit increases on unemployment duration. They found that all 13 studies connected increased UI benefits with longer unemployment durations.

Additionally, they cite other studies that indicate enhanced benefits increased the length of unemployment. For instance, University of Wisconsin professor Noah Williams found that the states that ended federally enhanced unemployment benefits before the federal deadline showed improved labor market outcomes compared to those that continued their participation in the expanded UI programs.

In conclusion, Farren and Kaiser wrote:

Some pundits seem to have rushed to the defense of federally expanded UI programs when the July jobs report was released, arguing that there was no evidence that the programs discouraged employment. But this perspective cannot be reconciled with decades of labor market research. Furthermore, even research that has been framed as proof that the federal expansion to UI had no employment-discouraging effect itself acknowledges that workers were 20 percent more likely to accept jobs in states that had opted out.”