Dollars and Jens
Wednesday, March 17, 2010
Incentives from unemployment benefits
Fraction of unemployed people who start working, relative to when they exhaust their unemployment benefits:Krugman is quoted here as suggesting that incentives to find jobs simply don't matter in a recession because there aren't jobs; this seems like a particularly bad case of failing to recognize the heterogeneity of an economy, which is particularly important for things of this sort. A lot of people are losing jobs, and a lot of people are starting jobs; the balance for the last year or two has been slightly toward the former, but there have been a lot of job offers being made and accepted, even in 2009. Further, I don't think anybody imagines that this is primarily a case of people watching TV until two weeks before they're offered a job and then finding a job as soon as they care to look for one; if you're offered a job that would pay 20% less than what you made at your last job and would be less interesting or prestigious, you're more likely to take it if you have two weeks of unemployment compensation left than if you have 20.

This brings me to the point that, this notwithstanding, it doesn't necessarily mean that unemployment insurance is a bad thing. To some extent, letting people look around for the right job, rather than simply the first one that's offered, will benefit the economy in the longer run. This will be less true, though, when people overestimate what they're likely to be able to find, as is frequently the case in recessions; a lot of computer programmers in 2001 thought they were worth a lot more than they were, and the same is probably true of construction workers and investment bankers right now.

Finally, note that this is a bounded rationality argument. Ideally, people would be funding this search time from their own savings, which would be put aside with the possibility of unemployment in mind; they would weigh the value of continued search against taking a job sooner. For unemployment insurance to improve efficiency by enabling people to remain unemployed longer, it has to be playing a role in which people are more or less desperate for a job when they don't have the checks coming in and are much less concerned when they do. If someone with savings and a clear assessment about the value of taking a given job at a given time turns down a job that he would have accepted if he weren't getting unemployment checks, then that's pure loss.

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