The Economy Has Done Okay Since Long-Term Unemployment Benefits Ended

From Scott Sumner.

"I will illustrate the problem with modern economics by discussing the impact of extended unemployment insurance. Last spring, Paul Krugman suggested that the elimination of the emergency extended unemployment program in 2014 was not leading to more jobs, thus refuting the claims of conservative opponents of the program. In earlier posts he suggested that ending the extended UI program would mean less fiscal stimulus, and hence more unemployment. As we'll see, this prediction turned out to be as ill timed as his famous "test" of market monetarism comment, which occurred a year earlier. Nonetheless, at the time it looked like Krugman might be right, as the first quarter of 2014 was weak (perhaps due to bad weather.) In addition, Congress was still debating an extension, which would have applied retroactively to those still unemployed.

In numerous posts over at TheMoneyIllusion, I suggested that the 99-week extended unemployment insurance program had probably increased the unemployment rate by about 0.5%. That's perhaps 700,000 people, which is significant, but not the major cause of high unemployment during the recession. I always acknowledged that this was little more than a guesstimate.

Now Tyler Cowen directs us to a fairly rigorous academic study that uses a "difference in difference" approach and estimates that ending extended UI led to an additional 1.8 million jobs in 2014:

We measure the effect of unemployment benefit duration on employment. We exploit the variation induced by the decision of Congress in December 2013 not to reauthorize the unprecedented benefit extensions introduced during the Great Recession. Federal benefit extensions that ranged from 0 to 47 weeks across U.S. states at the beginning of December 2013 were abruptly cut to zero. To achieve identification we use the fact that this policy change was exogenous to cross-sectional differences across U.S. states and we exploit a policy discontinuity at state borders. We find that a 1% drop in benefit duration leads to a statistically significant increase of employment by 0.0161 log points. In levels, 1.8 million additional jobs were created in 2014 due to the benefit cut. Almost 1 million of these jobs were filled by workers from out of the labor force who would not have participated in the labor market had benefit extensions been reauthorized.

Obviously this study is far superior to my guesstimate. And in a sense it does support my side of the debate I'm having with Keynesians, who (falsely) accuse me of promoting the "lazy worker" theory of unemployment. So I should jump on this result, right? Especially since I can't find any flaw in their empirical work (although honestly I just skimmed the paper.) 

In fact, I'm not being a good Bayesian, I'm not shifting my prior view that extended UI cost about 700,000 jobs, although I am widening the band around that estimate to include 1.8 million as a plausible estimate. I'll try to explain my stubbornness, and I want smarter, less biased people to tell me if I am wrong.

In 2012 the US created about 2.25 million jobs, and in 2013 it created about 2.35 million jobs. In late 2013, before it was known that extended UI would be repealed, most economists seemed to expect 2014 to be at least as good as the previous two years. The markets also seemed to expect continued growth, although unfortunately we lack good RGDP and NGDP futures markets. But my sense was that 2014 was likely to be similar to 2013, and it seemed to me that forecasters in academia and the asset markets both expected a similar result.

In fact, employment growth in 2014 was 2.95 million, a number quite likely to be revised higher in the next year or two. That's why I still think 700,000 is a decent ballpark guesstimate. I just don't find it plausible that job growth would have suddenly plunged to 1.15 million in 2014, if nothing had been done about extended UI. I saw nothing going on in terms of "shocks" that would have suddenly caused job growth to slow.

If the markets agreed with me, the difference would have been about 700,000. If they agreed with Marcus Hagedorn, Iourii Manovskii, and Kurt Mitman, the difference would have been 1.8 million. If they agreed with Krugman it might have been negative (fewer jobs if the program ended.) Think of the market forecast as a sort of meta-study, which efficiently incorporates Krugman's arguments, my arguments, and the empirical work in the study mentioned above."