Unemployment Insurance is like Ice

Paul Krugman has a post correctly bashing the nonsensical criticisms to unemployment insurance (UI):

Here’s what is true: there’s respectable research — e.g., here — suggesting that unemployment benefits make workers more choosy in the search process. It’s not that workers decide to live a life of ease on a fraction of their previous wage; it’s that they become more willing to take the risk of being unemployed for an extra week while looking for a better job.

 His analogy:

One way to think about this is to say that unemployment benefits may, perhaps, reduce the economy’s speed limit, if we think of speed as inversely related to unemployment. And this suggests an analogy. Imagine that you’re driving along a stretch of highway where the legal speed limit is 55 miles an hour. Unfortunately, however, you’re caught in a traffic jam, making an average of just 15 miles an hour. And the guy next to you says, “I blame those bureaucrats at the highway authority — if only they would raise the speed limit to 65, we’d be going 10 miles an hour faster.” Dumb, right?

His analogy is actually too easy on the crowd. Here’s why that’s the case, from the Massachusetts government:

Unemployment Insurance is a temporary income protection program for workers who have lost their jobs but are able to work, available for work and looking for work.

Receipt of UI benefits is contingent on one staying in the labor force. So when people tell you “UI increases unemployment” they may be right in a technical sense (and Krugman suggests why that’s wrong today). Even if so, the U3 measure has a numerator and a denominator, broadly:

• Numerator: People in the labor force who a) don’t have a job but b) have actively looked for the past four weeks
• Denominator: People in the labor force.

The biggest “increase” in unemployment from UI, then, comes from the “have actively looked for the past four weeks” by decreasing the number of discouraged workers. While demographic shifts are one cause of labor force exit, studies suggest that explains only 50% of the phenomenon.

Therefore, I think Krugman’s gone too easy. Even to the extent UI increases unemployment, it’s a “good” thing, by increasing labor market flexibility which has huge supply-side dividends. I have a high prior it decreases hysteresis, and chances are the only people who don’t are those who reject hysteresis outright (no comment there).

Most of us agree that worker protections are a good thing. Even “pragmatic libertarians” like Megan McArdle support unemployment insurance on “humanitarian” grounds. There are two ways we can help workers, either through the ridiculous French system of making it illegal to fire workers (which also makes it harder to fire them) or through a “flexicure” system where the state provides generous unemployment insurance and reemployment credit.

The former shrinks labor supply, the latter increases it by creating a healthier labor market. So if I could modify Krugman’s analogy I would go thusly:

In a recession cars at the front start moving slowly which makes the whole pack slower. The government can’t convince the first cars to go faster, so it decreases, literally, the friction of the road ahead by icing it. Now, the first cars can’t control themselves and start going faster. Allowing cars at the back to do the same. As they start going faster, heat generated increases, and the ice starts melting rather quickly. 

There you have the last benefit of UI, too. It’s an automatic stabilizer. Politicians couldn’t screw it up even if they wanted to.