Kudlow Wrong Again: Unemployment Benefits

As of June 30, Congress has not passed a bill to extend unemployment benefits to those chronically unemployed. For millions of Americans, their unemployment benefits may run out before they are able to find a job.

To Larry Kudlow, this is a good thing: http://tinyurl.com/yapyroo

It’s an economic principle that if you subsidize something, then you get more of it. If you pay people not to work, then some people would prefer to sit on the couch watching reruns of American Idol than get out and look for a job. It’s a sound economic theory.

But Kudlow is wrong. Unemployment is not a subsidy. It’s insurance. Employers pay insurance premiums. The premiums depend on number of employees, salaries and history. If an employer has a history of a lot of layoffs, then their premiums go up. The unemployed are merely collecting an insurance payout.

As Kevin Williamson explained in a recent column at NationalReview.com, “unemployment benefits are one of the better social safety-net programs we have in the United States. They’re not terribly expensive, in real terms; they reward work; and they have the happy effect of encouraging a dynamic labor market and supporting risk-takers who seek better lives in new jobs.”

It’s true that some jurisdictions have generous unemployment benefits. New Jersey pays up to $600 per month. That’s $30k per year pace. That’s nice. But you won’t get the full amount unless you’ve been making $50 k or more over the prior year. Minimum wage workers won’t be able to get the entire amount, only 60% of prior earnings. That’s still not bad. Certainly some people might be tempted to take the benefit rather than make a real effort in looking for work. One can understand how overly generous unemployment benefits might cause an increase in unemployment.

But like many sound economic theories, it only works under certain conditions. Under normal conditions, it’s valid. But in a depressed economy with high unemployment, its effect on unemployment is minimal. How many of those slackers would be able to find a job even if they tried? If the jobs aren’t available, then the unemployed aren’t going to be able to go back to work even if they wanted to. Cutting their benefits in an effort to reduce unemployment and stimulate the economy is ludicrous. Kudlow makes it seem as if there are employers out there unable to fill open positions because the millions of unemployed workers are happily collecting benefits and have no desire to return to work.

Under a healthy economy, long periods of generous unemployment benefits may cause a slight increase in unemployment. But in an economy with nearly 10% unemployment, little to no growth in private sector jobs and slow growth, it’s stupid to suggest that generous unemployment benefits are a significant factor in the high rate of unemployment.