Economics Made Simple - Unemployment Version

July 11, 2010
Posted by Jay Livingston

Economics, as Tyler Cowen says, is “really, really, really . . . hard.” But there are simple versions of economics, and I don’t mean just Father Guido Sarducci’s five-minute- university version (this earlierSocioblog post has a link to Fr. Sarducci).

Here’s a letter from the New York Times arguing that current proposals to extend unemployment benefits will actually increase the unemployment rate.

The more government subsidizes unemployment, the more people will indulge in it for longer periods of time.
--Ryan Young, Washington, July 6, 2010
The writer is a journalism fellow at the Competitive Enterprise Institute.

When I read this, I assumed the writer was some smug, smart-assed kid (what is a “journalism fellow” at CEI anyway?) who had learned one or two principles in Econ 101 and had no sense of how real people think and act – people who have lost their jobs and are scraping by on $300 a week in unemployment benefits (the US average).

A couple of days later, the Wall Street Journal ran a full op-ed by Arthur Laffer, a well-known economist and not a kid, saying the same thing.

The most obvious argument against extending or raising unemployment benefits is that it will make being unemployed either more attractive or less unattractive, and thereby lead to higher unemployment.

Economists sometimes clarify principles by using simplified models. Here’s Laffer’s explanation of the effects of unemployment benefits.

Imagine what the unemployment rate would look like if unemployment benefits were universally $150,000 per year. My guess is we'd have a heck of a lot more unemployment.

Marx (or somebody) said that differences in degree eventually become differences in kind, but Laffer doesn’t think so. He is arguing that a few more weeks at $300 is just a smaller version of $150,000 a year for life.

He provides some evidence in this graph (note the compassionate title):


According to Laffer, the graph shows that “since the 1970s there’s been a close correlation between increased unemployment benefits and an increase in the unemployment rate.” [emphasis added]

Correlation is not cause. In fact, what I see in the graph is that the increase in benefits almost always follows the increase in unemployment. That’s exactly what would happen now. Unemployment goes up, people can’t find work, and Congress increases the amount or length of benefits. There is a correlation, but the cause goes the other way.

I have heard many politicians argue that because unemployment is high, we need to extend benefits. It’s much rarer to hear people say that they have chosen not to work because that $300 a week is just too tempting.