Revisiting the Economy's 'Straw Man'

by: Casey Mulligan

Last year I was told that "incentives do not matter" is a "straw man" -- that nobody actually believes this, so that my raising the issue was just rhetorical smoke and mirrors rather than a rebuttal of a real-live argument.

As recently as Sunday, you could read this:

"Everyone agrees that really generous unemployment benefits, by reducing the incentive to seek jobs, can raise the NAIRU ... But in case you haven’t noticed ... What’s limiting employment now is lack of demand for the things workers produce. Their incentives to seek work are, for now, irrelevant. [emphasis added]"

And it's not just one guy. One of the world's leading labor economists was quoted as saying, "Traditionally, many economists have been leery of prolonged unemployment benefits because they can reduce the incentive to seek work. But that should not be a concern now because jobs remain so scarce," and mention of incentives like these was conspicuously absent from his testimony to Congress on what's going on in the labor market. (If you think it's just two guys, look here and here).

As often as I see this claim, and how critical it is to evaluating public policy, I never see any evidence cited to support it. Meanwhile, contradictory evidence is easy to find, even during recessions. There are two types of evidence:

(a) When a group of people is suddenly presented, during a recession, with different incentives to earn, that group suddenly changes its work and earning behavior. Last week I displayed a striking chart on unemployment duration in Pittsburgh during the early 1980s recession, when unemployment was higher than it is now, and stayed that way for years. Last summer I wrote about teenagers who are much more likely seek work when school lets out for summer. Tino pointed me to a paper about the Swedish unemployment system, which became less generous during a Swedish recession (I call it a recession because unemployment had surged and surpassed 9 percent).

(b) Such groups do not merely switch places with other groups, but rather their behavior affects aggregate employment. I have shown how this worked in the summer of 2009, and for the first 12 months of this recession in the building industry.