Jobless benefits cut unemployment rate, Fed economist confirms

Zachary Roth

The Wall Street Journal reports that the extension of unemployment benefits included in Washington's pending tax-cut plan will raise the jobless rate -- chiefly by making people less energetic in looking for work. But the author of the very government study the Journal relies on to make its case tells The Lookout that he believes the opposite is the case.

As part of the deal to preserve the Bush tax cuts for two years, the president and GOP congressional leaders agreed to an extension of jobless benefits for another 13 months. The Journal's Kelly Evans writes that this bodes ill for the jobless rate, pointing to an April study by the Federal Reserve Bank of San Francisco. In that document, Fed economists found that extending benefits at the end of 2009 made unemployment slightly higher than it would otherwise have been. Congressional Republicans have long argued against extending benefits on these grounds. As Evans sums it up: "More jobless benefits, more unemployment."

But Rob Valletta, the San Francisco Fed economist who co-authored the study with Katherine Kuang, said that conclusion is off the mark.

The confusion arises from the distinction between how expanded benefits affect the overall economy and how they may influence individual behavior. On the individual level, the report found a 0.4 percent rise in unemployment -- modest, but not trivial -- as a result of extending benefits, for exactly the reasons Republicans and the Journal say: Unemployment insurance "makes it easier to bear unemployment, and people therefore take more time looking for a new job," Valletta told The Lookout. Indeed, a follow-up study conducted by Valletta and Kuang through November 2010, at the request of Bloomberg Businessweek, found a slightly larger effect of 0.8 percent.

But as Valletta noted, plenty of other research indicates that on the macro-economic side, the benefits can improve economic conditions. Studies show [pdf] that unemployment benefits are a particularly effective way to stimulate the economy, because the poor have little choice but to spend the money rather than save it. And stimulating the economy creates jobs. A study last month by the progressive Economic Policy Institute found that extending the benefits would create more than 700,000 jobs. Indeed, some commentators described Obama's tax cut deal as a "second stimulus" -- largely because of the benefits extension.

"These separate effects act in opposition to one another," said Valletta. So the question becomes: Which effect is greater, in our current situation?

On this, Valletta was clear. In the current weak labor market, he said, the micro effect is relatively small.  "I think the macro-economic effects, in terms of reducing the unemployment rate, outweigh the micro effects that increase the unemployment rate," he said.

That's the overwhelming consensus view -- even if some members of the press don't seem to have noticed it.

(Photo: AP/Matt Rourke)