Will the extension of unemployment benefits encourage people to remain unemployed?
Last week, Obama signed into law an extension of unemployment benefits to 99 weeks. Supporters of the extension argue that it is a sensible thing to do when the economy is in dire straits, and that the presently unemployed deserve a safety net to shelter them from circumstances not entirely of their doing. Opponents argue that the extension will delay economic recovery by discouraging people at the margins from working. Although economic in nature, these arguments speak to the basic assumptions that both sides have about human preferences.
The supporters’ argument implicitly assumes that the supply of labor is relatively inelastic; this corresponds to an argument that incentives will not strongly influence how much a person works. Work is something that most people prefer to have as a matter of self-respect or a desire to keep active. Since it is not for lack of desire to work that people are unemployed, they deserve assistance from the state.
The opponents’ argument posits that the supply of labor is relatively elastic, and that how much people work is very much influenced by incentives. In this thinking, leisure is a luxury that people want more of while labor is something grinding, burdensome and best forgotten. There is some empirical evidence pointing in this direction. The end of open-ended welfare under Clinton dramatically increased the employment rate of the urban poor.
There is surely a degree of truth to both arguments. Unfortunately, macroeconomics is still a young science and nobody has either perfect information or perfect theory.
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