Do Extended Unemployment Benefits Increase Unemployment? No.


Goldman Sachs released a report today Wednesday for its clients about unemployment, and finds that extension of unemployment benefits in a recession does not actually make workers lazy and unwilling to work.

Some commentators have argued that extended unemployment insurance (UI) benefits are the key reason for high unemployment in the United States. Using data from 20 OECD countries we present evidence to the contrary. Our results suggest that only ½ percentage point of the current 9.4% jobless rate can be explained by the extension of UI benefits. Moreover, our calculations suggest that this effect will fade when the extended benefits eventually expire. These estimates — broadly in line with a recent study by the San Francisco Fed — reinforce our view that the overwhelming share of unemployment is cyclical rather than structural.

Emphasis ours.

To the math!

We find that a 10 point increase in the replacement rate — broadly similar to what we saw during the Great Recession in the United States — is associated with a 0.2pt increase in the unemployment rate in the same year. Given the persistence in unemployment, the effect ultimately grows to just above 1 percentage point if the extension of the benefits is permanent (calculated as 0.2 divided by (1–0.83)). These estimates suggest that the unemployment rate is currently ½ percentage point higher due to the extension of the UI benefits than it otherwise would be.

So if you hear a politician saying this, please take away his job, because he’s too misinformed to govern.