The Anti-Stimulus

Economists agree: unemployment benefits hurt employment rates

Job fair / AP
February 15, 2013

Unemployment insurance and other forms of government benefits act as a disincentive to work, economists across the political spectrum agree.

Three different economic experts testified before the House Oversight and Government Reform Committee’s Subcommittee on Economic Growth, Job Creation, and Regulatory Affairs on Thursday afternoon during a heated and contentious hearing. All said that government benefits that kick in during unemployment decrease the economic incentive to pursue work, although they disagreed about the extent of the benefits’ effect.

"The focus of today’s hearing is on the unintended consequences that too often stem from well-intentioned policies," said Subcommittee Chairman Jim Jordan (R., Ohio) in his opening statement for the hearing, "Unintended Consequences: Is Government Effectively Addressing the Unemployment Crisis?"

Casey Mulligan, an economics professor at the University of Chicago and author of a recent book on the effect that safety net programs have had on employment, argued that the government’s expansion of assistance programs in the wake of the recession actually has made it financially harmful to return to work in some cases.

He called the loss of benefits caused by employment the "job acceptance penalty," and noted that a high penalty—100 percent of profit in some cases—is associated with low employment rates.

Jordan emphasized Republicans’ support of social welfare.

"Of course we believe in a safety net for those who have fallen on hard times, but people must not be made worse off as a result of that safety net," he said. Mulligan also argued for the value of social safety net programs.

Rep. Matt Cartwright (D., Penn.), subcommittee ranking member, lamented the focus of the hearing in his opening statement.

"We are busy worrying about unintended consequences of unemployment insurance, when we should be worried about the unintended but clear as day consequences of a sequester that will put an additional two million people out of work."

Rep. Gerry Connolly (D., Va.) was dubious about the three economists’ claims about federal benefits.

"Do you subscribe to the theory that by ipso facto unemployment insurance actually serves as a disincentive to employment in this country?" he asked Mulligan.

"It is a disincentive," he said. "It reduces aggregate employment. It reduces aggregate spending. Maybe worth it for helping people, but helping people is not free," Mulligan said, visibly agitated. "I’m not here to testify to what’s politically correct."

While Mulligan emphasized the drag that unemployment insurance and other programs have had on employment, Chad Stone, chief economist for the Center on Budget and Policy Priorities, argued that these government programs have stimulated the economy.

"In a weak economy, UI [unemployment insurance] creates demand that would not otherwise be there," Stone said.

Federal spending as a share of GDP has dropped over the past few years, he said.

"Austerity is contractionary," Stone said.

Eugene Steuerle, a tax expert at the Urban Institute, said the labor market has been changing over the past decades and emphasized the piecemeal and disjointed way in which taxes—including benefit programs—are considered.

"It’s hard to design programs well if we lack even basic understandings of all the ways they interact," he said.

Two other individuals provided more qualitative testimony to the subcommittee. Stacey Reece, owner of an employment placing company in Georgia, shared his experience trying to place individuals who have been on unemployment because of the recession.

Annie Carter, president of a machine company in Ohio, testified to her difficulty trying to hire machinists. She argued that unemployment insurance and other benefits have depressed individuals’ desire to find work.

"In our area it’s become very obvious that work is an option, not a necessity," she said.

She argued that unemployment insurance has depressed the labor market in her county, making it difficult for her business to hire qualified workers.

Freshman Rep. Tammy Duckworth (D., Ill.) expressed exasperation at Carter’s testimony.

"I was on food stamps, and oftentimes those food stamps provided the only meals that I ate throughout my teenage years," Duckworth said. "I hope you don’t think that I look like someone who is lazy and on government handouts."

Duckworth took particular exception to Carter’s assertion that unemployment benefits encourage drug abuse and laziness.

"I think that there are many people who receive benefits who are not drug addicts and are abusing drugs," she said.

"My statement doesn’t say 100 percent of people are on, have drug problems," Carter said.

She explained that the individuals who lose their job because of drug problem could immediately begin taking unemployment benefits.

"I leave unsatisfied because I hear from the right and the left" that unemployment insurance acts as a disincentive to work, Connolly said toward the end of his questioning time.