It’s the Great Recession, Not the Great Vacation, That’s Responsible for High Unemployment

December 15, 2011 at 1:55 pm

Two competing narratives frame the debate about why unemployment remains so high even though the economy has been growing for more than two years.

The mainstream “Great Recession” narrative holds that the economy fell into a deep hole in 2008 and has been climbing out of it so slowly because demand has grown so slowly.  Jobs continue to be very hard to find, no matter how hard unemployed workers look for them; employers are reluctant to hire until they see stronger signs that their sales will pick up soon.

The “Great Vacation” narrative holds that unemployment insurance (UI) benefits — in particular, the added weeks of benefits for the long-term unemployed that Congress has funded in the past few years — have dissuaded millions of unemployed workers from taking a job.  If, then, jobless workers would get off their duff (or if we would give them a good swift kick there), unemployment would plummet.

That narrative seems to be motivating the latest House UI proposal, which curtails the number of weeks of UI benefits available, would allow states to alter the fundamental social insurance nature of the program, and includes a number of “reforms” that would make it more difficult for workers who lose their jobs through no fault of their own to have access to the program (see our critique).

Research strongly rejects the Great Vacation narrative, notwithstanding the efforts of some economists to misrepresent that research.  As Brad DeLong points out, for example, Casey Mulligan cites a study in arguing that UI benefits are a major cause of higher unemployment — but that study actually sums up the research (as of early 2010) as suggesting that only an eighth to a third of the rise in unemployment since the start of the recession resulted from the added weeks of benefits, with the true effect likely at the lower end of that range.

A more recent analysis from Berkeley economist Jesse Rothstein finds even smaller effects:

The estimates imply that UI benefit extensions raised the unemployment rate in early 2011 by only about 0.1-0.5 percentage points, much less than is implied by previous analyses.

Rothstein also found that more than half of this small increase in the unemployment rate occurred as workers receiving those added weeks of UI benefits stayed in the labor force looking for work, rather than drop out in discouragement.

When the unemployed stop looking for work, that reduces the unemployment rate (which only counts people actively looking for work), but it doesn’t help them or the economy or result in more workers having jobs.

To be sure, some UI recipients have slipped past state UI administrators’ efforts to ensure that they search for a new job and take a suitable one when it’s available.  It’s also true, as Casey Mulligan says, that “the recession and lack of recovery have more than one cause.”

But it would be a serious mistake to conclude that the truth lies somewhere in the middle between the Great Vacation and Great Recession explanations — like saying that Philadelphia lies somewhere in the middle between New York City and Los Angeles.  If you rely on the Great Vacation explanation, you’ve barely started your journey to understanding why unemployment is so high.

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More About Chad Stone

Chad Stone

Chad Stone is Chief Economist at the Center on Budget and Policy Priorities, where he specializes in the economic analysis of budget and policy issues. You can follow him on Twitter @ChadCBPP.

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3 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. 1

    Wow, your article is riddled with evidence to the contrary – that increased unemployment benefits actually INCREASE unemployment – but you somehow manage to conclude the opposite. You very cleverly accomplish that feat by creating a strawman of the “great vacation,” and then pointing out that it’s certainly not more than 1/8 to 1/3 true.

    For a counter-argument, look no further than President Obama’s recent hire, Alan Krueger, recently confirmed as the chairman of the White House Council of Economic Advisers. My article here goes into detail on his research on the effects of UI on unemployment.

  2. 2

    Grandpa and Grandma are being thrown under the bus – so is everyone else, but worse for seniors – they have no time to regain what they have lost.
    1. Pensions are wiped out by big corporations in Ch 11 bankruptcies
    2. Age discrimination in employment is rampant
    3. Soc Sec and Medicare are being attacked – Soc Sec is only income for many
    4. Banks pay .5% interest on savings accounts (if you are fortunate enough to have any $)- interest is taxable – thus you can go backwards financially by leaving $ in a bank account.
    5. Home values have plummeted – the only source of income for many seniors has disappeared.
    6. Wages are flat (that is if a senior can overcome age discrimination which sets in about age 40).
    7. Government says no inflation – have any of them been to a grocery store or gas station – food and energy are two necessities that seniors must buy

    Horatio Alger myth that hard work and thrift will make you wealthy is just a myth – it will get you into the poorhouse.

    And we need campaign finance reform – too many politicians have been bought off by the lobbyists in Washington DC. We have the finest politicians that money can buy and too many have been bought. We have the finest law system that money can buy and if you don’t have $$$ – forget about ever seeing justice.

    Alice Thomas

  3. ezra abrams #

    why don’t economist understand how to make a welfare queen rides cadillac argument ?
    the reason the vacation argument gets traction, outside of the wackos on the right who think that wages should fall to 50cents/hour to clear the market, is that all of us know a person who is on great vacation.
    So, in any such discussion, you have to bring up credible evidence to show that such people are a minority of the population

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