The 'Stimulus' for Unemployment | Alan Reynolds | Cato Institute: Commentary

The 'Stimulus' for Unemployment | Alan Reynolds | Cato Institute: Commentary: "As Larry Summers, the president's top assistant for economic policy, noted in July, 'the unemployment rate over the recession has risen about 1 to 1.5 percentage points more than would normally be attributable to the contraction in GDP.' And the rate has moved nearly a percentage point higher since then, even though GDP increased. Countries with much deeper declines in GDP, such as Germany and Sweden, have unemployment rates far below ours.

Summers knows why the US rate is so high. He explained it well in a 1995 paper co-authored with James Poterba of MIT: 'Unemployment insurance lengthens unemployment spells.'

That is: When the government pays people 50 to 60 percent of their previous wage to stay home for a year or more, many of them do just that."

"Incidentally, the 'mercy' of longer benefits does no long-term favors: The literature is quite clear that a prolonged period on unemployment tends to depress income for years after you finally go back to work"

"Last August, Krueger and Andreus Miller of Princeton also found that 'job search increases sharply [from 20 minutes a week to 70] in the weeks prior to benefit exhaustion.'

Similarly, Meyer found 'the probability of leaving unemployment rises dramatically just prior to when benefits lapse.' In other words: If you extend benefits to 79 weeks, many people won't find an acceptable job offer until the 76th or 78th week."

"Katz also found that extended benefits, by making it easier for workers to wait and see whether they get their old jobs back, also makes it easier for employers to delay recalling laid-off workers. Just before unemployment benefits run out, Katz found 'large positive jumps in both the recall rate and new job finding rate.'"