September 9, 2008
Increase in unemployment not due to extension of jobless benefits
Some analysts have suggested that the dramatic increase in unemployment from July to August 2008 was due to the extension of Unemployment Insurance benefits from 26 weeks to 39 weeks that occurred in August. Their claim is that since people are eligible for benefits for a longer period of time, they may wait longer before accepting a job.
Both economic theory and empirics belie their claim. In today’s economy, unemployment is not about deciding whether or not to accept job offers, it is about the absence of job offers. Since January, the economy has shed 605,000 jobs, including an average loss of 81,000 jobs per month over the last three months.
- The theory: In a period when the economy is strong and creating jobs, economists disagree on the extent to which unemployment insurance discourages the jobless from seeking work. However, in a period when jobs are being shed and unemployment is rising—a period like the one we are in now—there is a strong consensus among economists that unemployment benefits do not create a job-seeking disincentive. In 2002, for example, Alan Greenspan stated in testimony before Congress “[W]hen you get into a period where jobs are falling, then the arguments that people make about creating incentives not to work are no longer valid and hence, I have always urged that in periods like this, the economic restraints on the unemployment insurance system almost surely ought to be eased to recognize the fact that people are unemployed because they couldn’t be in a job, not because they don’t feel like working.”
- The empirics: The official unemployment rate can be decomposed into “flows.” In other words, we can examine the labor force status in July of people who were unemployed in August to determine which of three categories these unemployed workers fit into:
1. “Continuing” unemployed—unemployed in both July and August;
2. Newly unemployed, from employment—employed in July and unemployed in August; and
3. Newly unemployed, from outside the labor force—not in the labor force in July and unemployed in August.
If the extension of jobless benefits were driving the increase in unemployment, we would expect a big bump up in category 1, as people remained unemployed from month to month. But the data show that only 20% of the increase in unemployment from July to August was due to people remaining unemployed month to month. Historically, when the unemployment rate has increased by at least one-tenth of a percentage point, an average of about 40% of the increase has been due to people remaining unemployed month to month. The current value is thus particularly low.
Instead of an increase in people remaining unemployed from month to month, over two-thirds of the increase in unemployment from July to August is due to category 2—people entering unemployment from employment. These numbers unequivocally demonstrate that the unemployment rate is increasing because people are losing their jobs, not because they are choosing to remain unemployed.
For the full analysis of the Bureau of Labor Statistics report for August 2008, read EPI’s latest Jobs Picture.
To view archived editions of JOBS PICTURE, click here.
The Economic Policy Institute JOBS PICTURE is published each month upon release of the Bureau of Labor Statistics’ employment report.
EPI offers same-day analysis of income, price, employment, and other economic data released by U.S. government agencies. For more information, contact EPI at 202-775-8810, or visit us on the Web at www.EPI.org.
