Tuesday, October 8, 2013

Unemployment Benefits Decrease Poverty? Really?!

With the possible exception of the Pew Research Center, I would opine that any think-tank has its Weltanschauung, even my most favorite think-tank, the Cato Institute. Worldviews notwithstanding, I still expect a think-tank to maintain as much objectivity as possible, regardless of its leanings. I was under the impression that the Center of American Progress (CAP) was the Left's equivalent of the Heritage Foundation, and that CAP would be the only think-tank to lean that far to the Left. In spite of leaning to the Left, I thought that a think-tank such as the Center on Budget and Policy Priorities (CBPP) was still respectable as think-tank. But then I read an article of theirs postulating that a key reason why poverty has not declined is because the government has not pumped enough money into unemployment insurance (UI), and I had to reconsider.

If CBPP is correct in its assertion, at the very least, there should be a high correlation between poverty rates and money spent on unemployment benefits [per recipient]. This means that X leads to Y, i.e., increasing spending on UI leads to lower poverty rates. Whether it is with something like crime or poverty, I have a problem when people say that X is [one of] the [primary] causes of Y because the world is usually much more complex than that. Their assertion should be easy to [dis]prove. First, aggregate the data on money spent on unemployment insurance, which is courtesy of the Department of Labor. Then, aggregate the data on poverty rates (Census) and synthesize the data to run a regression analysis. Unfortunately, due to the government shutdown, I was unable to retrieve the poverty rate data. The link should work when the tomfoolery in DC is over, but in the interim, I have to show graphs illustrating the trends of both spending on unemployment benefits and poverty rates. (I may or may not run the bivariate regression once the shutdown is over). I created the first graph since the Department of Labor's graph was not as illustrative (FYI: The first graph is in real 2013 dollars). The second graph comes from the UC-Davis Center of Poverty Research, whose graph is based on data from the US Census. 

When comparing the poverty rate trend with the outlays in unemployment benefits, I am looking at these trends and I am not seeing anything remotely resembling causation. Now why would that be? Given the interconnectedness of economic activity, you would think that factors such as supply and demand, technology and innovation that typically lower prices, rates of taxation, the number of burdensome regulations, monetary policy, or larger forms of fiscal policy would be better explanations for the poverty rate. But no, the CBPP wants to cling on to the notion that unemployment benefits are so pivotal that if we eliminated unemployment insurance right this second, we would most likely have a double-dip recession. 

Much like with food stamps, one would have a much stronger argument if unemployment insurance were used for temporary financial relief, as opposed to long-term poverty relief. For one, if the job market truly worked where the government could just print money and send people a paycheck, why not do so as a long-term stimulus? That way, no one would have to work ever again. The downside to that is that is not how the world of economics works. 

I also brought this up last year during my kvetch about unemployment benefits, but one of the primary functions of unemployment insurance is that it is essentially a subsidy for unemployment. As the Federal Reserve of Chicago (Mazumder, 2011), Federal Reserve Bank of San Francisco (Valletta and Kuang, 2010), Federal Reserve Bank of Philadelphia (Hagedorn et al, 2013, which goes into detail as to how the unprecedented length of unemployment insurance has caused much of the uptick in the unemployment during the Great Recession), and other economists (Rothstein, 2011; Zandi, 2012) all point out, how can you expect there to be any poverty relief when unemployment insurance only increases unemployment? It doesn't matter if you cut back on the waste created by unemployment insurance or create more stringent forms of conditionality because politicians cannot escape economic reality, no matter hard they try. In my humble opinion, if politicians are going to try anything, it should be collaborating on solutions that actually work instead of squabbling over Obamacare and debt ceilings while shutting down the government.

11-16-2014 Addendum: Add the Federal Reserve Bank of St. Louis to the list of those who found that unemployment benefits create substantial issues (in this case, moral hazard and monitoring costs). Apparently, the basic universal income would be a better policy alternative in comparison.

2-2-2015 Addendum: This study is worth the read (Hagedorn et al., 2015) because it shows that removing unemployment benefits added 1.8 million jobs to the economy in 2014.


  1. My reply ended up a bit longer and strayed from the exact topic somewhat, so I have posted in on my blog instead.
    In summary: It's an economic stabilizer which will keep down (prevent the increase in) poverty if there is a healthy economy to stabilize, but will fail if the economy is seriously damaged. Economic recovery should be the priority, but without abandoning those in need.

    1. Question: At which point would you consider the economy "seriously damaged?" I ask because in the past 30 years, each time the outlays shot up was during a recession, which would be a sign that the economy is not doing well.

  2. You've slightly exaggerated the claim of the article you're responding to here. It doesn't state strictly that X leads to Y, but that X has impacted Y and therefore, Y would be improved if X was improved. That's an important distinction.

    1. Dear Doone,

      Thank you for your comment! There is a difference between X policy being the [primary] cause of effect Y versus it being one of the many policies to be the cause of effect Y. I understand the distinction you make, I understood it when I was reading CBPP's article, and I am glad you brought it up. I've read CBPP's research enough to know that they opine that any welfare program enacted by the government helps alleviate poverty. Since they did call UI "pivotal" and claimed that UI is powerful enough where the poverty rate would have fallen even further if more money had been pumped into the program, I took the claim a step further to see just how pivotal it was. Although one could theoretically argue that the positive effects of UI were negated by other effects, given the literature I cited within my blog, at best, I find that idea to be dubious.