Unemployment Insurance: Making Sure We Get the Extra Unemployment We Need?

by: Casey Mulligan

Evidence that unemployment insurance causes more unemployment is easy to find. So a few stimulus law advocates (recall that actual and prospective stimulus laws spend significant money on unemployment insurance programs) have embraced that evidence, claiming that workers can gain something by being unemployed longer, because they can search for a better job.

Suppose for a moment that their claim -- unemployment time is socially productive -- is correct. Still, the claim does not rationalize unemployment insurance. Actually working is productive too, that's why people get paid for doing it. And it's widely recognized that the observed behavioral reactions occur because unemployment insurance subsidizes unemployment relative to working. Efficiency is lost whenever one productive activity is subsidized relative to another. In other words, the argument that unemployment insurance is inefficient in no way relies on an assumption that unemployment is entirely wasteful.

The marketplace involves a myriad of decisions between alternate productive activities, and the case for subsidies happens only when the market by itself would excessively favor one over the other.

So if you want to defend unemployment insurance on the grounds that unemployment is productive, you need to further argue that the market by itself results in too little unemployment, so that unemployment insurance helps ensure that we get the extra unemployment that society needs!

Such a claim would be logical, and perhaps even correct, but I predict that stimulus law advocates are unwilling to make it.