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Report: We Can Put People Back to Work by Cutting Unemployment Benefits

John on September 8, 2011 at 8:28 am

So it turns out that if you subsidize something, say not working, you get more of it:

The benefits would keep millions of unemployed from slipping into poverty and indirectly enable consumer spending, which would create 200,000 jobs next year, accomplishments Obama could tout on the campaign trail.

But the same analysis also shows that allowing for 99 weeks of benefits encourages the jobless to linger and expands a labor pool that would otherwise shrink. As a result, the current 9.1 percent unemployment rate has been elevated by roughly half a percentage point, said Macroeconomic Advisers senior economist Ken Matheny.

This phenomenon would most likely disappear if Congress fails to renew the extended benefits for another year.

Now, from what I’ve read, 200k jobs is about the number of jobs we need every month just to keep the unemployment rate steady. Spread that out over a year and it’s a rounding error, not something to boast about during an election. I don’t understand how that’s a viable option for the President.

But here’s what I really don’t get about this article. If paying people not to work will indirectly create 200k jobs, how many jobs are created in the alternative scenario, i.e. when we cut the benefits and that 1/2 a percent decides to stop lingering?

Politico doesn’t tell us how many folks we’re talking about in that .5%, but I found a handy chart here that says the CBO has already crunched the numbers. According to the chart it would take between 3.8 and 4.7 million jobs to lower the unemployment rate to 8.2% or about one full point. So, presumably, it would take about half that many jobs over the next year to lower the rate half a point.

Just ballpark figures, but it sounds like we’re talking about roughly 2 million people who are lingering on unemployment. Now if unemployment is cut, not all of these people will get jobs. Some will become “discouraged workers” and no longer be counted. I contacted the company that wrote this report to see if they could offer a breakdown of the percentages that would fall into each category but they failed to reply.

For the sake of argument, let’s assume that 90% will become discouraged and just 10% will take jobs. Based on the figures in that chart, we’re still talking about roughly 200k people going back to work.

So if we go with these round numbers we have a choice between paying people not to work, thereby creating 200k jobs; or not paying them not to work, thereby creating 200k jobs. Granted it’s a close one but I’m going to go with door #2.

Of course that’s cold comfort for the folks who don’t get jobs, but ultimately unemployment does run out and nearly two years of benefits seems like a pretty generous hand up.

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