National Bureau Of Economic Research Paper Claims Cutting Unemployment Insurance Played Major Role In 2014 Job Growth

NBER: Scaling Back Emergency Unemployment Benefits Played A Major Role In 2014 Job Growth. According to a January 2015 National Bureau of Economic Research working paper, cuts in unemployment insurance caused “nearly all” of the 2014 employment growth:

The analysis based on this simple inference implies that the cut in benefits in 2014 can explain nearly all of the observed aggregate employment growth in 2014. The abrupt reversal in the relative employment growth trend of high benefit states and border counties in December 2013, right at the time when the benefit durations were cut, strongly suggests that our analysis indeed identifies the implications of this particular policy change. There were no other policy changes at the turn of 2014 likely to have significant labor market implications. Moreover, we are not aware of any policy changes that could have differentially affected states depending on their pre-reform benefit duration. [National Bureau of Economic Research, January 2015]

Right-Wing Media Outlets Use Flawed Study To Attack Unemployment Insurance

Wash. Times: “Feds' Unemployment Benefits Made Job Recession Worse: Study.” The Washington Times used the NBER paper to claim that unemployment insurance disincentivizes work:

If you pay people not to work, they won't work -- and cutting off their payments sends them scurrying back into the job market, according to new research by three academics who looked at the federal government's extended unemployment benefit program and concluded that it actually deepened, rather than helped, the jobs recession. [The Washington Times, 1/26/15]

Wash. Examiner: Paper “Gives Ammo” To Conservatives Who Claim Safety Net Programs Discourage Employment. The Washington Examiner suggested that the NBER paper supports the conservative view that anti-poverty programs encourage people to rely on government support instead of seeking work:

The study gives ammo to conservatives who argue that welfare benefits for able-bodied adults encourage people to live off government handouts instead of seeking work. Only 62.7 percent of civilians are members of the labor force, the lowest rate since 1978. Participation was even lower prior to women joining the labor force at accelerated rates in the 1970s. [Washington Examiner, 1/26/15]

Wall Street Journal: Absent Unemployment Insurance Extension, “Both Individuals And The Larger Economy Would Have Been Healthier.” A January 27 Wall Street Journal editorial claimed that extending unemployment benefits “discourage[d] businesses from hiring” and damaged the economy as a whole:

Since the states with the highest unemployment were targeted with the most federal benefits, the extra benefits harmed the people and regions that suffered the worst of the recession and weak recovery. Had Mr. Obama done the opposite, the stimulus might have recognized that people prefer the dignity of a job to claiming a government stipend for not having one. Both individuals and the larger economy would have been healthier. [The Wall Street Journal, 1/27/15]

But The Paper's Co-Author Rejected Idea That Unemployment Insurance Disincentives Work

Paper's Co-Author Rejected The Idea That Unemployment Insurance Fosters Laziness. According to the Washington Post, co-author Kurt Mitman rejected “the idea that people just collect the check and sit at home and watch T.V.” (emphasis added):

That said, the results are not a vindication for Republicans like Sen. Richard Shelby (R-Ala.). “People, if you pay 'em for years and years, they won't look for a job,” he said, reiterating a common conservative argument against unemployment insurance.

In an interview, Mitman rejected “the idea that people just collect the check and sit at home and watch T.V.” People who are out of work are always out looking for jobs, whether or not they're getting unemployment insurance, he said.

Instead, because they were receiving checks, the unemployed could afford to wait until they found a job with a higher wage. It wasn't workers who gave up, the group argues -- it was employers, who found that they had to pay more to bring in new labor. After a while, they were less likely to advertise new vacancies. [The Washington Post, Wonkblog, 1/27/15] 

The NBER Working Paper Relied On Flawed Methodology And Data

The Roosevelt Institute: NBER Working Paper Failed To Back-Up Its Claims About Employer Dynamics. The Roosevelt Institute's Mike Konczal argued that the NBER paper failed to address the central claim, “that employers must boost the wages of workers and create fewer job openings as a result of unemployment insurance tightening the labor market” with evidence that wages declined following the extension of unemployment insurance:

The results HMM get are radically higher than these other studies. They argue that this is because they look at the “macro” effects of unemployment insurance. Instead of just people searching for a job, they argue that labor-search models show that employers must boost the wages of workers and create fewer job openings as a result of unemployment insurance tightening the labor market.

But in their study HMM only look at aggregate employment. If these labor search dynamics were the mechanism, there should be something in the paper about actual wage data or job openings moving in response to this change. There is not. Indeed, their argument hinges entirely on the idea that the labor market was too tight, with workers having too much bargaining power, in 2010-2013. The end of UI finally relaxed this. If that's the case, then where are the wage declines and corporate profit gains in 2014? [Roosevelt Institute, 1/27/15]

Center For Economic And Policy Research: A Similar Study Conducted With More Reliable Data Produced The Opposite Conclusion. Center for Economic and Policy Research director, Dean Baker criticized the NBER paper's methodology explaining that the use of state level data “can easily be driven by errors in the data.” Baker added that similar research found that shortening the length of time a beneficiary received unemployment insurance “had little impact on employment growth”:

This is an interesting result which contradicts much prior research indicating that shortening benefit duration had little impact on employment growth (e.g. here, here, here, and here). It is worth testing this result with an alternative data series. HMM use the Current Population Survey for the state level data and the Local Area Unemployment Statistics (LAUS) for the county level data. These series are both problematic for this sort of analysis.

First, state level data for the current population survey is extremely noisy. Results can easily be driven by errors in the data.

The second issue is that these are in principle household based surveys that report employment based on where someone lives. This is problematic because unemployment insurance will depend on the state in which a person works. If a person lives in New Jersey but works in New York, then they will get benefits according to New York law, not New Jersey law. If New Jersey increases or reduces the duration of benefits, it will not have a direct effect on this person's work behavior.

The third problem is that the LAUS data are largely model driven. There is little direct data for many counties. The Bureau of Labor Statistics (BLS) generates employment estimates for these counties from a variety of variables, including unemployment insurance claims. This makes them of questionable value in this sort of exercise. [Center for Economic and Policy Research, 1/26/15]

Wash. Post Cautioned Against Attributing Employment Trends To Changes In Unemployment Insurance. The Washington Post's Wonkblog explained that Congress made the most drastic changes to unemployment insurance benefits in states hardest hit by the recession. Given that economists expect the greatest recovery from these hard-hit states, the Wonkblog argued that the paper's conclusions could reflect overall recovery trends rather than the effects of unemployment insurance:

Since the federal insurance program provided more generous unemployment benefits in states with higher rates of unemployment, Congress reduced benefits most drastically in the states with the worst economies. Data from counties in those states would reflect the poor economic condition of the state as a whole. And since economies tend to bounce back harder the farther they've fallen, the fact that employment improved more quickly in those counties with drastic cuts in unemployment might simply result from the fact that the statewide situation was worse initially. [The Washington Post, Wonkblog, 1/27/15]

Unemployment Insurance Stimulates Economy, Encourages People To Look For The Most Productive Jobs

Economic Policy Institute: Unemployment Insurance Is “Among The Most Effective Forms Of Economic Stimulus.” According to the Economic Policy Institute, unemployment insurance allows federal and state governments to inject money into the economy, effectively replacing some of the economic activity that is lost during a recession, when unemployment rises and wages go down:

This finding has largely been reinforced by the examination of UI and labor market outcomes during and after the Great Recession, including at the state level. And yet several states chose to cut the duration of jobless benefits in recent years. We find that the track record of the UI system over the last decade strongly argues against such cuts, and for policy measures that could better ensure that the UI system serves its countercyclical role of boosting spending in times when demand drops. Such measures could be pursued by states doing a better job of prefunding UI trust fund accounts during economic expansions as well as by federal lawmakers substantially increasing the federal commitment to the UI system. [Economic Policy Institute, 1/28/14]

Unemployment Insurance Leads To An Overall More Productive Economy. The Roosevelt Institute's Mike Konczal reported on the positive effects of unemployment insurance, “including income support, increased aggregate demand and the increased efficiency of people taking enough time to get the best job for them.” [Roosevelt Institute, 1/27/15]