Does a European Safety Net Mean Great Unemployment?

by: Mark J. Perry

Following the post in yesterday's NY Times Economix blog "Eurosclerosis Comes to America" by Casey Mulligan (U. Chicago economist), the chart above shows monthly payroll employment and monthly job openings (both from BLS) from January 2004 to May 2010 (job openings for June are not yet available). Casey Mulligan wrote:

"This recession has been unique in terms of the multitude of public policies that dull incentives to work and earn income. Best known are unemployment benefits, which are paid only to people who have not yet accepted a new job. But the mortgage modification programs, begun by the Bush administration and tweaked by the Obama administration, offer mortgage forgiveness to borrowers with low incomes while offering nothing to those with high incomes.

The new home-buyer tax credit, the enhanced food-stamp program and many other programs in President Obama’s stimulus bill are much the same: people without low incomes need not apply. People accepting jobs in this economy see their various safety-net benefits reduced or eliminated.

Payments to the unemployed are compassionate, and maybe even the best government reaction to a deep recession. But previous economic research has shown that this compassion has a cost: programs like these make it more difficult for employers to fill their job openings. It is no surprise that adopting a European safety net is giving us a European unemployment problem."

Casey shows a graph of job openings and jobless rates to support his conclusions (similar to the bottom chart above), and the chart above of job openings and payroll employment tells the same story. Since the end of last year, payroll employment has only increased by an anemic .77% while job openings have increased by a much healthier 26.6%. Over the last year, job openings have increased by almost 29%, while the unemployment rate has barely moved, as Casey's graph and data show, possibly due to all of the generous jobless benefits and the many extensions to those benefits.

The chart above shows that the historically close relationship between payroll employment and job openings has not held up very well over the last year, for the reasons that Casey outlines. And the huge increases in online job availability as documented by the Monster Employment Index also lends some support to the fact that job openings are showing strong gains, which have not yet shown up in employment gains and jobless rate decreases.

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