February 3, 2015

How to Boost Employment

Did ending the extension of unemployment benefits help create jobs?

If there’s one thing on which Barack Obama is consistent, it’s taking credit for the success of policies that weren’t actually his. Recall his boasts about wiping out al-Qaida, the boom in U.S. oil production and boosting job creation while ending the recession. In the latter case, it turns out it was the end of one of his polices that had a significant role in creating jobs in 2014.

In 2008 and 2009, the narrative was that the government needed to pump billions of dollars into the economy in order to fix it. Leftist central planners hailed this Keynesian approach as the answer to America’s economic woes. We witnessed cash for clunkers, the auto bailout, and, of course, the “stimulus.”

Part of that near-trillion-dollar boondoggle was the lengthy extension of unemployment benefits. The Wall Street Journal notes that before the stimulus states would typically offer unemployment benefits that would expire after 26 weeks. Under the Pelosi Congress, those benefits were extended an additional 53 weeks, but that apparently wasn’t enough, so Congress created a 20-week bonus program on top of that. This lavish giveaway granted almost two years’ worth of unemployment compensation to qualified individuals.

In December 2013, Obama refused to work with the GOP-led House on unemployment reform, so the House let the unemployment extensions expire. Predictably, the president blasted cruel Republicans for denying people the opportunity to pay rent or buy food. Obama deemed it nearly impossible for millions of Americans to make it on their own without long-term assistance from government.

Yet according to a recent report from the National Bureau of Economic Research (NBER), “1.8 million additional jobs were created in 2014 due to the benefit cut. Almost 1 million of these jobs were filled by workers from out of the labor force who would not have participated in the labor market had benefit extensions been reauthorized.”

However, other economists found the methodologies used to arrive at the 1.8 million jobs estimate inaccurate, and they contend that one policy change cannot account for that many jobs. Dr. Salim Furth, a senior policy analyst in macroeconomics at the Heritage Foundation, suggests, “Despite the promising macro statistics, the new paper struggles to accurately measure the impact of unemployment insurance.”

What does this mean and why does it matter?

According to Dr. Furth, there is a cost-benefit aspect of unemployment insurance. “The macroeconomic costs to unemployment insurance come from the demand side. Employers have a narrow benefit from each marginal hire, so hiring can respond a lot to a small shift in wages. Unemployment insurance gives potential employees more bargaining power, raising the equilibrium hiring wage a little, but lowering the equilibrium number of hires a lot.”

While the GOP’s decision to end the perpetual extension of unemployment benefits certainly wasn’t the single cause of an increase in jobs in 2014, there is no doubt a correlation in the number of people now in the workforce.

If people are paid not to work for an extended period of time, it creates a disincentive to find a job. While those who are hired for a job paying below what they want to earn may not like it, at least they are working and at least they have the opportunity to move up or move on to something else rather than staying on the taxpayer dole.

James Madison, the author of our Constitution, once said, “Charity is no part of legislative duty of government.” This is an incredibly difficult and seemingly heartless argument to make today. The vast majority of Americans either do depend or have depended on some form of the “safety net,” or they at least advocate its continuance.

The best practical solution then is to push policies that promote the general welfare rather than provide for it – which is exactly what ending the extension of unemployment benefits has done for many Americans.

Unemployment insurance can ease the pain of someone losing their job. However, relying on it for too long during a time of recession leads to a longer and slower recovery.

Obama and those around him who subscribe to a centrally planned economy tend to really mess things up rather than make them better. One can only imagine what our economy would be like if the central planners would let go of the reins.

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