Pay Me to Get a Job

In July, North Carolina cut its maximum unemployment benefit from 99 to 19 weeks and from $535 to $350 per week. Since that time North Carolina’s workforce – those with a job or looking for one – has reportedly shrunk sharply.

According to Republicans money transfers are a disincentive to work, so giving them less or no money should result in more people working. Republicans tend to make this blanket claim regardless of the situation. Democrats often highlight the individual and social benefits from keeping people out of dire straights. They say that sufficient unemployment benefits keep people from falling so far that they lose interest in working or resort to desperate actions.

If someone reading this knows of good, fairly unbiased economic research that tests these opposing views, I’d like to know.

However, this Bloomberg journalist thinks North Carolina’s recent experience is a natural experiment that provides irrefutable and conclusive evidence for the Democrats’ view.

Cutting unemployment insurance apparently hasn’t encouraged the unemployed to look harder for work: It has caused them to drop out of the labor force altogether.

To get unemployment insurance, you have to actively search for work and prove that you’re doing so. The drop in the labor force suggests that this incentive was effective. Without it, more people just give up.

The  journalist goes on to provide no evidence to support the above claim.

Obviously we have only short-term information from one state. Really this is a datum, not a data set. There is also baseline neglect here – without a model of the North Carolina economy we can’t say how much of the workforce change might be due to fewer people receiving benefits.

But there’s something even more glaring and it’s captured in the journalist’s own words: “To get unemployment insurance, you have to actively search for work and prove that you’re doing so“. People receiving unemployment benefits have a direct incentive to report that they are looking for work. Once someone is no longer eligible for benefits, the incentive disappears.

It’s important to remember that unemployment information is based on surveys – households are asked whether they are working and, if not, whether they are looking. If someone collecting benefits gets that survey call, what are they going to say? “No, I only applied for a couple jobs I had no intention of getting because I need to do it to get my unemployment check. Really I’m sitting on the couch eating chips and watching TV.” Of course not. They’ll claim to be looking for work.

It’s ironic that the debate around unemployment benefits revolves around incentives, yet this author can’t recognize this simple incentive.

I think another source of empirical data would be needed to measure workforce participation during a period with a “structural break” in incentives. Perhaps a survey of employers would help by asking how many total and qualified applications they receive per position. If the total number of applications dropped when people lost benefits but the number of qualified applications was constant, that would be evidence contrary to the journalist’s conclusion.

Note that I am actually more sympathetic to the Democrats’ line during the current economic conditions. I would support a gradual reduction in benefit amount but only a small change in duration until conditions improve a bit more.

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