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It’s the Great Recession, Not the Great Vacation, That’s Responsible for High Unemployment

December 15, 2011 at 1:55 PM

Two competing narratives frame the debate about why unemployment remains so high even though the economy has been growing for more than two years.

The mainstream "Great Recession" narrative holds that the economy fell into a deep hole in 2008 and has been climbing out of it so slowly because demand has grown so slowly. Jobs continue to be very hard to find, no matter how hard unemployed workers look for them; employers are reluctant to hire until they see stronger signs that their sales will pick up soon.

The "Great Vacation" narrative holds that unemployment insurance (UI) benefits -- in particular, the added weeks of benefits for the long-term unemployed that Congress has funded in the past few years -- have dissuaded millions of unemployed workers from taking a job. If, then, jobless workers would get off their duff (or if we would give them a good swift kick there), unemployment would plummet.

That narrative seems to be motivating the latest House UI proposal, which curtails the number of weeks of UI benefits available, would allow states to alter the fundamental social insurance nature of the program, and includes a number of "reforms" that would make it more difficult for workers who lose their jobs through no fault of their own to have access to the program (see our critique).

Research strongly rejects the Great Vacation narrative, notwithstanding the efforts of some economists to misrepresent that research. As Brad DeLong points out, for example, Casey Mulligan cites a study in arguing that UI benefits are a major cause of higher unemployment -- but that study actually sums up the research (as of early 2010) as suggesting that only an eighth to a third of the rise in unemployment since the start of the recession resulted from the added weeks of benefits, with the true effect likely at the lower end of that range.

A more recent analysis from Berkeley economist Jesse Rothstein finds even smaller effects:

The estimates imply that UI benefit extensions raised the unemployment rate in early 2011 by only about 0.1-0.5 percentage points, much less than is implied by previous analyses.

Rothstein also found that more than half of this small increase in the unemployment rate occurred as workers receiving those added weeks of UI benefits stayed in the labor force looking for work, rather than drop out in discouragement.

When the unemployed stop looking for work, that reduces the unemployment rate (which only counts people actively looking for work), but it doesn't help them or the economy or result in more workers having jobs.

To be sure, some UI recipients have slipped past state UI administrators' efforts to ensure that they search for a new job and take a suitable one when it's available. It's also true, as Casey Mulligan says, that "the recession and lack of recovery have more than one cause."

But it would be a serious mistake to conclude that the truth lies somewhere in the middle between the Great Vacation and Great Recession explanations -- like saying that Philadelphia lies somewhere in the middle between New York City and Los Angeles. If you rely on the Great Vacation explanation, you've barely started your journey to understanding why unemployment is so high.