Why Is Unemployment So High This Labor Day?

Unemployment is in the news again.  In a detailed op-ed piece in The Wall Street Journal this week, Robert Barro shows why he believes unemployment would be significantly lower if unemployment benefits had not been extended from the standard 26 weeks to 99 weeks.  His calculations indicate that unemployment might be under 7% right now if only the unemployment benefits had not been extended to 99 weeks.  Is he right?  Why is unemployment so high this labor day?  Let’s talk about it now.

In economics, we know that when we tax something, we get less of it.  We also know that when we subsidize something, we get more of it.  It’s just common sense.  Taxing something like smoking cigarettes, discourages smoking cigarettes because the price goes up for smokers.  Similarly, if we subsidize something, we encourage it because we create an economic incentive for that activity.

Incidentally, that’s why we shouldn’t tax income, savings, and investment.  Taxing income, savings, and investment is essentially taxing economic growth.  We want more economic growth and prosperity, not less.

So, Mr. Barro is right that subsidizing unemployment benefits beyond some reasonable level does not make economic sense.  Of course, as a society, we need to be compassionate.  Some individuals and families need help desperately.  But, at some point, we encourage people to stay unemployed.  The fact that during one of the worst times in this recession, March 2009, there were 3.9 million people hired (while 4.7 million people left their jobs), meant the economy was adding workers.  Would more people have been hired if their unemployment benefits had been close to running out?  The answer is – probably yes.

Indeed, the fact that the share of long-term unemployment (people unemployed for more than 26 weeks) hit a whopping 46.2% in June of this year, eclipsing any other recession since World War II, is a strong indication that we are encouraging people not to seek employment.

While the duration for unemployment benefits might be partially the cause of high unemployment this Labor Day, there are other root causes such as high taxes that continue to grow higher.

Choosing the Good Life Blog by Gerard Francis Lameiro, Ph.D.