How the Wall Street Journal misunderstands jobless benefits

The Wall Street Journal’s editorial page won’t be happy that this afternoon the Senate voted to extend jobless benefits another 27 weeks. It argued this morning that any such extension would only keep Americans out of work:

In the immediate policy case, Democrats are going so far as to subsidize more unemployment. If you subsidize something, you get more of it. So if you pay people not to work, they often decide . . . not to work. Or at least to delay looking or decline a less than perfect job offer, holding out for something else that may or may not materialize.

The editorial cited the work of three economists to bolster its case, but let me discuss their findings later. The key sentence in this paragraph is the following: “If you subsidize something, you get more of it.” That’s the heart of the editorial page’s argument. Everything flows from that statement. Yes, that assertion is qualified, but it is also restated in the final paragraph, the editorial criticizing the Obama administration for “paying people not to work.”

“If you subsidize something, you get more of it” sounds like a strong argument. It’s simple and clear. But stop to think whether it’s true. Certainly professional baseball and basketball players today are compensated much more handsomely today, as are many artists (authors, musicians, actors) Yet are baseball players superior to their counterparts in the 1950s and ‘60s or writers better than those of the 1920s? Few would argue that they are. Or let’s use an analogy of quantity rather than quality. Certainly the federal government spends more money on defense today, as a share of its budget, than it did during the height of the Korean and Vietnam wars. Yet does Uncle Sam have more troops than it did then or more defense broadly defined? The answer is not so simple.

In the case of unemployment benefits, the link between them and more joblessness is not ironclad. The WSJ editorial cited the recent findings of JP Morgan analyst Michael Feroli to conclude that extending jobless aide increases the jobless rate by 1.5 percentage points. But recent history does not support this claim. As the WSJ reported, the jobless rate in June actually fell in most states, a drop that occurred at a time when jobless benefits are relatively generous. Going back further in time, The Economist noted a similarly weak correlation:

Of the 47 weeks in emergency benefits enacted during this recession, only 20 of them had been passed into law by late 2009, at which point the unemployment rate was plateauing. Since the last 27 week extension, the unemployment rate has actually ticked downward. It therefore doesn’t make sense to argue that emergency unemployment benefit extensions can be blamed for 1.5% of the increase in the unemployment rate from 5% to 10.1%.

Granted, few economists argue that extending jobless benefits lowers the jobless rate. But debates about unemployment benefits are really a sideshow. The problem with the economy is not weak labor supply. It’s weak labor demand. Few employers are hiring. As Scott Winship wrote,

So as I’ve been following the debate about unemployment insurance and whether it actually worsens the unemployment rate, I’ve actually been open to the idea that being able to receive benefits for up to two years might create perverse incentives.  The research is not as uniformly dismissive of the idea as some liberal assessments have implied (go to NBER’s website and search the working papers for “unemployment” if you want to check this out yourself).

In particular, the idea that there were 5 people looking for work for every job opening struck me as sounding overly alarmist.  So I started looking into the numbers to determine whether I thought they were reliable.  The figures folks are using rely on a survey from the Bureau of Labor Statistics called the Job Openings and Labor Turnover Survey, which unfortunately only goes back to December of 2000.  But the Conference Board has put out estimates of the number of help wanted ads since the 1950s.  Through mid-2005, the estimates were based on print ads, as far as I can tell, but the Conference Board then switched to monitoring online ads.  You can find the monthly figures for print ads here and the ones for online ads here.  The JOLT and unemployment figures are relatively easy to find at BLS’s website.

When I graphed the two Conference Board series (which requires some indexing to make them consistent–the print ad series being an index pegged to 1987 while the online series gives the actual number of ads) against the number of unemployed, and then the JOLT series against the unemployed, here’s what I found:

I’ll just say I was shocked and that I am much more sympathetic to extension of unemployment insurance than I was yesterday.

Winship’s argument undercuts the conclusions of Lawrence Katz and Raj Chetty, the two Obama-friendly economists that the WSJ cited as proof of intellectual duplicity. Winship shows that this economy really is bad for workers. In fact, it’s the worst since the 1950s at least.

The WSJ editorial makes a persuasive and clear case. Its arguments just happen to be off base.