Barro On Extending Unemployment Benefits

I am dedicating a second post to Robert Barro’s article, “The Folly of Subsidizing Unemployment,” a rare occurrence.  The first post, “Barro on Obama’s Policy Objectives,” discussed a tangential point in Barro’s article.  The second will discuss his main point, that subsidizing long-term unemployment by extending benefits from 26 weeks to as much as 99 weeks is folly.  He begins by noting the tradeoff between efficiency and equity.

The unemployment-insurance program involves a balance between compassion—providing for persons temporarily without work—and efficiency. The loss in efficiency results partly because the program subsidizes unemployment, causing insufficient job-search, job-acceptance and levels of employment. A further inefficiency concerns the distortions from the increases in taxes required to pay for the program.

Peak Unemployment Rate	Nov-Dec 82	Oct 09
Unemployment Rate	10.8%	10.1%
Mean Duration (Weeks)	17.6	27.2
Long-term Share	20.4%	36.0%

Peak Mean Duration (Weeks)	Jul 83	June 10
Unemployment Rate	9.4%	9.5%
Mean Duration (Weeks)	21.2	35.2
Long-term Share	24.5%	46.2%

When considering the tradeoff, it would be nice to know the size of the efficiency loss.  Barro compares the current recession to that of 1982.  I have placed the data he discusses into two tables.  The first is a snapshot of long-term unemployment statistics when the unemployment rate peaked during the 1982 recession and the current recession.  The second looks at these statistics when the average weeks of unemployment peaked.    Barro notes that long-term unemployment is a more prominent feature of this recession and that unemployment benefits were not extended in the 1982 recession but were extended from 26 weeks to 99 weeks during the current recession.  He offers the extension of unemployment benefits as a possible explanation, he considers no others.  He asks what the world might be like if the benefits were not extended and assumes that peak unemployment would have held at 24.5% of unemployed as it did in 1983, then total unemployment would have been 10.4 million rather than 14.6 and the unemployment rate would have been 6.8% rather than 9.5%.

This is a “back of the envelope” calculation that Barro calls “rough.”  I would consider two other factors if I were to attempt a more sophisticated model.  I would control for the age of the labor force, which has gotten older.  As another blogger, Calculated Risk, observed in “Older, more educated workers, have highest length of unemployment” in a tell-all title, older, more educated workers have the highest length of unemployment.  This raises an issue of causality.  Is the job search for these workers inherently longer than in the past or do they take longer to search for a perfect fit job because unemployment benefits have been extended?  Both may be true.  The latter explanation supports Barro’s hypothesis.

A second issue of note is that the unemployment rate, which is found by dividing the number of unemployed by the labor force participation rate, may influence the number of labor force participants.  High levels of unemployment discourage workers who drop out of the labor force.  As the economy improves, these workers may reenter the labor force keeping the unemployment rate higher than it would have been if the labor force remained constant through the recovery.  Barro assumes that the labor force participation rate does not change.