I’d like to engage my readers in a little thought experiment on extending unemployment benefits. We’re hearing more and more recently about the likelihood that the federal government will extend unemployment benefits for those whose benefits have run out:
WASHINGTON — President Barack Obama’s top economic advisers say the administration will work with Congress to extend unemployment benefits for millions of Americans.
The head of the president’s Council of Economic Advisers, Christina Romer, said Sunday that the administration is already looking ahead at an extension of benefits as that money runs out.
Democratic Rep. Charlie Rangel of New York says people who soon will lose their unemployment benefits deserve an extension. He says they are “the true victims” of the nation’s financial disaster.
Republican Sen. Jim DeMint of South Carolina says he also supports an extension of benefits.
It’s completely understandable, even commendable. Given how so many people live paycheck to paycheck and with the serious national level of unemployment, 9.5% and rising, we certainly wouldn’t like to see people seriously in want.
Doesn’t this raise a serious issue of moral hazard? While the national unemployment rate is high, it’s not uniformly high. Here are the unemployment rates, by state, for June 2009, the most recent available. Some states, notably California, Nevada, Oregon, and Michigan, have unemployment rates well over 10% and the conditions in those states strongly suggest that won’t improve any time soon. Shouldn’t we be encouraging people to go where the jobs are rather than subsidizing their staying put?
Another serious challenge is that we’ve never seen this serious a turndown in an environment in which two-job families were the dominant model. That raises the spectre of forcing a choice between breaking up families and freezing one parent out of the job market, possibly permanently, to preserve the other parent’s job. I think that’s something new, at least to this degree.
It certainly will change the economics of marriage. I understand that in the UK the economic turndown seems to have had the effect of lowering the divorce rate.
Thoughts?
The one thing that strike me in the list is that many or most of the low unemployment states are also low population states. It would not take long for the unemployed from Michigan and California to swamp the employment needs of North Dakota.
I think you are hinting at a key point that minimizes the moral hazard — the high transaction costs of moving in any circumstance much less now. Moving is a pain in the ass and it is expensive, even if one is moving from rental property to rental property.
Now if an individual owns a house in a median or above unemployment metro area, to move, they probably need to take a loss on the house in either a sale or in renting the house out for less than the current carrying costs (in addition to rental management fees even if those fees are a couple of cases of beer for your brother in law). Throw in the fact that moving between metro-areas (even in the same large state) means giving up on a massive amount of social network capital, a small subsidy for an extra few months is not a particularly high moral hazard hurdle.
Finally, what we want to avoid is too many areas with dumbbell population distributions, where the very old and the very young stay, and everyone else leaves. If an extra three to six months of benefits is what keeps the dumbbell from falling on our toes, that is a worthwhile trade-off in my opinion.