Sunday, November 10, 2013

How Economic Research can be Crap

According to three researchers at VOX, extended unemployment benefits "encourages job seekers to prolong their search."

Mark Thoma, Professor of Economics (University of Oregon) responded, "One thing that seems to be missing here is that one benefit of unemployment insurance is that it allows workers to find better matches for their skills."

And I would also add, "Yes, in a NORMAL downturn in a business cycle, both statements may be true to some extent (depending on an individual's personal circumstances), but the Great Recession was anything but NORMAL."

There is this report from the San Francisco Federal Reserve that concludes:

Although economists have shown that extended availability of UI benefits will increase unemployment duration, the effect in the latest downturn appears quite small compared with other determinants of the unemployment rate. Our analyses suggest that extended UI benefits account for about 0.4 percentage point of the nearly 6 percentage point increase in the national unemployment rate over the past few years. It is not surprising that the disincentive effects of UI would loom small in the midst of the most severe labor market downturn since the Great Depression.

But the authors at VOX research continue to argue, "Some observers argue that US unemployment would have returned much faster to normal levels if the US had not expanded the duration of benefit payments from 26 to 99 weeks."

But how can that be? Using the broader measurement of unemployment (the U-6 or the revised U-7 rate) there is 1 job opening for every 6 unemployed --- and it's been that way for years --- so the math doesn't add up. Using the multiplier effect, how many working people does it take to employ one unemployed person? If 6 "slackers" took 6 non-existent jobs, would that create 1 more job?

The authors of this research also says, "Additional costs arise because more generous benefits induce job losers to stay longer on unemployment insurance benefits or enter unemployment more frequently."

I suppose one can always find anecdotal evidence to show that there is a "slacker" in every government program, but it shouldn't be used as an economic measure in research (There is probably X amount of dollars lost that can be attributed to employee theft, which might also contribute to unemployment as well...if one wanted to stretch the horizon a bit and make that point.) But to basically say, unemployed people causes unemployment (cause and correlation) sounds like nonsense to me, and sounds more like ideological tripe than anything else.

Besides myself, I know of many others who have exhausted all their unemployment benefits 3 years ago without every finding another job again. Those who were laid off early on when the mass layoffs occurred (from late 2008 through early 2009) stayed unemployed for months on end as the layoffs had continued --- when no one was hiring at all. They had already became classified as "long-term unemployed" even before net job creation first began in June of 2009. Just by being out of work (and especially if they were 50+ years old) only contributed to their jobless status --- not because they weren't looking for work, but because no employer would to hire them. (That's a fact, not speculation by researchers.)

Also, most people are on a strict budget, and can't meet their monthly expenses after a very short time with the reduced jobless benefits. Eventually their savings run out (if they have any savings at all) and most people already have fixed financial obligations to meet (such as auto loans, mortgages, rents, etc.). So naturally they would (at first) seek out work that would at least pay as close to as much as they had previously earned --- and only then gradually lower the bar, until such time when they become totally desperate and take any job at all. (I know, I lived through this experience.)

The authors of this research mentions search externalities --- "When generous unemployment insurance induces all other workers to search less intensively, it becomes easier for me to find a new job."

The whole idea isn't just to search for "a new job", but a job that pays enough to meet someone's current financial obligations. One can't simply abandon their car payments to find a cheaper car to drive, no more than they can abandon a mortgage or lease to live in a cheaper place. Just by BEING unemployed can disqualify someone from obtaining a new lease or auto loan. A landlord or bank manager might ask, "Can I please see your past two weeks of pay stubs?". More generous unemployment insurance benefits (during a NORMAL economic downturn) provides someone more time to find something that's more survivable given their personal circumstances.

FOR EXAMPLE: If I were working as a CEO and I got laid off, the first job I'm going to look for is NOT for one in the mail room, but as a CEO --- and if that fails, then I'll apply as a vice president, then as a regional director, then as a manager, then as an assistant manager (and so on and so on), until I exhaust all my job options (the last being, at McDonald's or Walmart --- and the last I heard, they don't need to hire 19.93 million unemployed Americans anyway.)

The researchers used Austria during the period 1988–1993 as an example for people receiving extended unemployment benefits as being unemployed longer (and causing unemployment), which is a bad example of an example because that example in no way compares to the period in the aftermath of the stock market crash in the US beginning in 2008 and lasting until March 2009 ---and here's why:

We are still negative jobs --- 7.8 million jobs created vs 8.7 million jobs lost. and according to the NCES, a research arm of the U.S. Education Department, the U.S. also had approximately 18 million high school graduates from 2008 to 2013 --- minus about 1 million American workers who took an early Social Security retirement (with reduced benefits) and another 1 million net recipients on disability (from December 2008 to December 2012).

As the researchers noted in the very last sentence of their article: "Recent studies conclude that the US benefit extension programmes of the Great Recession increased unemployment significantly, but by less than half a percentage point." (How can the word "significantly" and "less than half a percentage point" mean the same thing --- and be in the same sentence?)

As far as prolonging a job search to stay on benefits longer --- take myself for instance: Admittedly, at first, I didn't seek re-employment immediately (for about two months) after I was first laid off --- but I was an exception to the rule, and for several reasons:

  1. Mass layoffs had continued heavily in all the places where I was qualified to work (and where I would have naturally first applied) in the industry where I was just laid off (I was 53 years old then). So I had asked myself, why bother looking right now? It would be like swimming against a rip tide.
  2. I was experiencing severe back pain back then (from hard work) and I had thought at the time that two months off from work would do me good. It turned out not to be --- I later learned that I had severe degenerative arthritis in my lower back (from years of hard work).
  3. I was lucky back then because I had over a year's of monthly expenses in my savings to help me augment my unemployment benefits for a time, so I could afford NOT to immediately search for work at that time --- but, most average working people don't have that kind of savings.
  4. After the initial mass layoffs, most people (including myself and all the "experts") didn't know then what we know now --- that unemployment would end up being as deep or as prolonged as it has been for the last several years (myself, in 2008 I had thought it would be like just after 911 and after those layoffs, and employers would be calling people back to work. But we've since learned, it didn't quite happen that way.
  5. After the first two months of being unemployed (even while the layoffs continued, and as unemployment remained very high where I lived, peaking at 15%) I still looked for work. I didn't want to supplement my jobless benefits forever by using my savings indefinitely. That would have been a huge financial waste (I didn't save just to take unneeded and unwanted idle time off from work).
  6. After two long years of job searching (all through 2009 and 2010), I found that: because I was unemployed, and because I was unemployed for so long, and because I was over 50 years old, employers weren't hiring anyone like me. Then, after two long years, when the jobless benefits and my savings were finally all gone, I got evicted and lost my car (after 3 years of payments were made on a 5 year auto loan).

So you see, in my case, the plan was, to maintain my status quo (by paying my rent and car payment) until I could AT LEAST find a job (any job at all) that would at least permit me to pay my rent and car payment (I wasn't even considering utilities and food, figuring, I'd just "wing it" some how.)

Here's what extended unemployment benefits did for allowed me to survive JUST LONG ENOUGH before I met someone who took me in to their spare bedroom to live, just 5 days before I was evicted. Essentially, extended unemployment benefits saved my life because, before I met this person, I had already carefully planned my suicide.

So all this talk about optimal levels, sufficient statistics, direct costs, well-identified measures, insurance generosity, theoretical analysis, micro studies and search externalities is just a load of crap...especially when you're talking about someone's life.

And finally, I don't even know why those researchers took the time to include the US in their "study" because by the end of the year, federal extended unemployment benefits are coming to an end anyway.

* I wrote on this same topic 2 years ago and earlier this year --- but some people want to keep beating this same old tired drum. Unemployment insurance benefits do not cause unemployment; just like disability benefits does not cause someone to become disabled; just like having health insurance does not cause someone to become sick.

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