Supply Matters, Even During Deep Recessions

“Traditionally, many economists have been leery of prolonged unemployment benefits because they can reduce the incentive to seek work. But that should not be a concern now because jobs remain so scarce, said Lawrence Katz, a labor economist at Harvard.” as quoted by the New York Times. (See also here for the same claim)

What is the basis for this claim? I’m not sure, but Professor Shimer kindly pointed me to an article about unemployment duration in Pittsburgh 1980-85. Unemployment rates got quite high in Pittsburgh in those days, reaching 16 percent at one point, and staying over 10 percent for two and a half years. The chart below shows some of the results. It graphs weeks from unemployment benefit exhaustion against the fraction of unemployment people either finding a new job or being recalled to a previous job in that week. “Exhaustion” refers to the time when benefits cease being paid to the unemployed person, regardless of whether they have found a job.

Almost no one started working during the 2-3 weeks prior to the exhaustion of their unemployment benefits (weeks “-3” and “-2” in the chart). Miraculously, more than one quarter started work a week later (19% started a new job, 10% returned to a previous job). Economists agree that a huge reason for this behavior is that people are more willing to remain unemployed when unemployment itself generates a paycheck. (The job they take may not be great, but the data show that often there is a job to take).

If incentives mattered in Pittsburgh in the early 1980s, why wouldn’t they matter in the United States today? Or why did employment increase almost 1,000,000 last summer?

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About Casey B. Mulligan 76 Articles

Affiliation: University of Chicago

Casey B. Mulligan is a Professor in the Department of Economics. Mulligan first joined the University of Chicago in 1991 as a graduate student, and received his Ph.D. in Economics from the University of Chicago in 1993.

He has also served as a Visiting Professor teaching public economics at Harvard University, Clemson University, and Irving B. Harris Graduate School of Public Policy Studies at the University of Chicago.

Mulligan is author of the 1997 book Parental Priorities and Economic Inequality, which studies economic models of, and statistical evidence on, the intergenerational transmission of economic status. His recent research is concerned with capital and labor taxation, with particular emphasis on tax incidence and positive theories of public policy. His recent work includes Market Responses to the Panic of 2008 (a book-in-process with Chicago graduate student Luke Threinen) and published articles such as “Selection, Investment, and Women’s Relative Wages,” “Deadweight Costs and the Size of Government,” “Do Democracies have Different Public Policies than Nondemocracies?,” “The Extent of the Market and the Supply of Regulation,” “What do Aggregate Consumption Euler Equations Say about the Capital Income Tax Burden?,” and “Public Policies as Specification Errors.” Mulligan has reported on some of these results in the Chicago Tribune, the Chicago Sun-Times, the Wall Street Journal, and the New York Times.

He is affiliated with a number of professional organizations, including the National Bureau of Economic Research, the George J. Stigler Center for the Study of the Economy and the State, and the Population Research Center. He is also the recipient of numerous awards and fellowships, including those from the National Science Foundation, the Alfred P. Sloan Foundation, the Smith- Richardson Foundation, and the John M. Olin Foundation.

Visit: Supply and Demand (in that order)

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