Department of "Huh?!" (Unemployment Insurance Edition)
Greg Mankiw writes:
Greg Mankiw's Blog: My Agnosticism about UI: A few readers have asked me to opine on the current debate over the extension of unemployment insurance benefits. I have avoided commenting on the topic because I am ambivalent on the issue, largely because I am agnostic about what economists know about optimal UI.... I have yet to see a compelling quantitative analysis of the pros and cons that informs me about how generous the optimal system would be.... It is plausible to me that UI benefits should last longer when the economy is weak. The need for increased aggregate demand is greater, and the impact on job search may be weaker. But this conclusion is hardly enough to tell us whether 99 weeks is too much, too little, or about right. It is also conceivable that the amount of UI offered in normal times is higher than optimal and that a further extension would move us farther from what is desirable.
I should note, by the way, that economists who strongly favor the extension of UI benefits, such as those who signed this letter, also tend to favor more income redistribution in general. I suspect, therefore, that the foundation of their support comes not from having weighed the specific pros and cons of UI per se, but rather from a more general desire to "spread the wealth around." That issue is, as I tell my students, more a matter of political philosophy than it is of economics.
This does surprise me.
I would have thought he would have said that continuing our current extension of unemployment insurance benefits to 99 weeks is a good idea:
Continuing the current extension is an expansionary short-run fiscal policy, the economy badly needs more expansionary short-run fiscal policy, and it is one of the few expansionary short-run fiscal policies that might get enacted in the current political climate.
Down the hall at Harvard he has Raj Chetty, who has thought as carefully as anybody about the pros and cons of unemployment benefits and about the optimal structure unemployment insurance. Cf. Chetty (2004), "Optimal Unemployment Insurance When Income Effects are Large" http://www.economics.harvard.edu/files/faculty/1238_ui_income.pdf. Down the hall at Berkeley I have Emmanuel Saez, who has also thought as carefully as anybody about the pros and cons of unemployment benefits and about the optimal structure unemployment insurance. Cf. Landais, Michaillat, and Saez (2010), "Optimal Unemployment Insurance Over the Business Cycle" http://elsa.berkeley.edu/~saez/landais-michaillat-saezNBER10UI.pdf. Both build on Baily (1978), "Some Aspects of Optimal Unemployment Insurance." Both conclude that an unemployment benefit-market wage of about 50% is about right unless you are in a state of affairs in which continuation of unemployment benefits for a particular group is materially reducing the total economy-wide level of employment. Since right now it seems to me highly likely that continuation of unemployment benefits for all groups are raising and not lowering employment--it is a fiscal stimulus in a 10% unemployment rate environment, after all--I don't see any technocratic argument for reducing the benefit-length ceiling below its current 99 weeks at all.
With respect to unemployment benefits and progressive income redistribution. Well, we do need more progressive income redistribution--remember that we are in a country where a generation ago the top 0.01% of households took 1% of total income, and now they take 6%. But that did not enter into my thinking. Remember: your unemployment benefits are an increasing function of your previous wage--it is an insurance program that redistributes to those who have lost as a result of the recession much more than a welfare program that redistributes to the poor. The belief that in a risk-averse world good government policy should reduce and spread risks is a somewhat different thing from a belief that good government policy equalizes incomes and makes everybody dress in identical blue overalls.
