Is the safety net keeping the unemployment rate high?

by Russ Roberts on December 11, 2012

in Work

In this recent EconTalk episode, I talked to Casey Mulligan about his new book, The Redistribution Recession. He argues in that book that the increased generosity of the safety net–unemployment compensation, food stamps, help with health care and so on, played a major role in worsening the recession and slowing down the recovery.

It’s a very interesting argument. It isn’t saying that we shouldn’t have a safety net. It’s saying that one of the consequences of a safety net is that unemployment will not respond to economy recovery the way it might otherwise.

Before the state of the recovery became an ideological football, most (all?) economists would agree that paying people when they are unemployed would encourage unemployment. Increasing the amount paid to unemployed people would make the unemployment rate higher than it otherwise would be. The question remains as to the magnitude of the effect. I’ve been a little skeptical of the potential magnitude because unemployment compensation isn’t that generous. What Mulligan shows is that when you combine all of the benefits that come when you’re unemployed, it’s a reasonably large sum of money for a lot of folks. He also tries to quantify the precise impact of that generosity across the economy. I’m skeptical about his methodology but put that to the side. Here’s a report from MSNBC which lends support to Mulligan’s claim (HT: Steve Spiller):

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What remains a puzzle to me is why manufacturers don’t offer higher wages instead of complaining that they can’t fill their openings. I presume that the higher wages necessary to attract people would make the manufacturing unprofitable. But if I were a reporter, that’s what I’d be looking at.

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