Are Jobs Returning Because Extended Unemployment Benefits Ended?

We’re seeing a (somewhat) improving job
market in 2014, with the official unemployment
rate finally dipping below 6 percent last month for the first
time since 2008. Is the economy finally improving? Or could it be
that our own federal government kept hiring at an anemic level with
its own policies, essentially taking a baseball bat to the kneecaps
of the job market? Three economic analysts with the Federal Reserve
Bank of New York argue that Emergency
Unemployment Compensation, implemented as a temporary measure
in 2008, extended several times by Congress, and finally expired at
the end of 2013, deserves much of the blame for limping job
prospects over the past few years. They say its expiration can be
thanked for new “help wanted” listings.

As authors Fatih Karahan, Samuel Kapon, and Kaivan K. Sattar
note in “Do
Unemployment Benefits Expirations Help Explain the Surge in Job
Openings?“

Preexisting legislation provided for up to twenty-six weeks of
UI and, in states with a high unemployment rate, the Extended
Benefits (EB) program provided twenty additional weeks. EUC started
by allowing for an extra thirteen weeks of benefits to all states
and was gradually expanded to four tiers, providing up to
fifty-three additional weeks of federally financed benefits. This
extension increased the maximum duration to an unprecedented
ninety-nine weeks.

The very extended unemployment insurance was meant to
provide a cushion for people thrown out of work by the Great
Recession. That’s an easy sell when the economy is lousy, and when
job listings look awfully sparse. As that sparsity continued, it
was easy to persuade lawmakers to renew extended benefits again,
and again. But what happens when you do that, write Karahan, Kapon,
and Sattar, is that “increases in UI generosity put upward pressure
on wages since it becomes more expensive to lure people into work.
As a consequence, firms anticipate lower profits and cut back job
creation, which lowers the job finding rate and increases the
unemployment rate.”

So, you create a cycle of suckage as labor becomes too expensive
for business to hire, even as it’s not being put to use, and that
kills job potential openings which…

This shouldn’t have been a surprise, argue the authors, since
the Nobel Prize in Economics was awarded in 2010 for the
development of the
Diamond-Mortensen-Pissarides model, predicting exactly such a
perverse effect.

In our real world test for Diamond-Mortensen-Pissarides, the
expiration of Emergency Unemployment Compensation at the end of
2013 finally provided an opening for the job market to recover.
“EUC expiration raised the job openings rate by 0.6 percentage
point to 3.4 percent,” the authors argue, “remarkably close to the
realized rate in the Job Openings and Labor Turnover Survey (JOLTS)
report of 3.3 percent for June 2014.”

Recovery was delayed until then, they say, by
continuing debates in Congress over renewing EUC. Once the
possibility died, the jobs revived.

You see, government programs really do help the
economy. When they go away.