Krueger’s Unemployment Insurance Problem

President Obama’s new Council of Economic Advisors chairman Alan Krueger is being brought on basically to do one thing: create jobs out of thin air. It’s sad, really, that the administration has asked a man to do the impossible. But the labor economist from Princeton has taken the job with gusto so he’ll have only himself to blame when running into himself on economic theory.

As it turns out. Krueger’s own research runs in the face of Obama administration policy and past proposals on unemployment insurance. Given that the President will likely suggest some extension of UI in his speech next monday (some how creating jobs out of checks for people to not work), it is an important discrepancy. WSJ has the details:

…Mr. Krueger wrote in a study with Bruce D. Meyer for the National Bureau of Economic Research Working Paper series in 2002:

“This chapter examines the labor supply effects of social insurance programs. . . . The empirical work on unemployment insurance (UI) and workers’ compensation (WC) insurance finds that the programs tend to increase the length of time employees spend out of work.”

The authors found that the incentive effects of unemployment insurance on recipients to delay finding a job are not insignificant and that “the estimates of the elasticities of lost work time that incorporate both the incidence and duration of claims are close to 1.0 for unemployment insurance.”

For people who didn’t attend Princeton, this means that paying people not to work increases the incentive not to work and thus tends to encourage longer periods of joblessness. This sounds closer to what critics of endless jobless benefits have been saying than to the White House policy line.

As recently as 2008, Mr. Krueger also found negative effects from making unemployment insurance more generous. In “Job Search and Unemployment Insurance: New Evidence from Time Use Data,” he wrote that “across the 50 states and D.C., job search is inversely related to the generosity of unemployment benefits, with an elasticity between -1.6 and -2.2.” Mr. Obama should read the study, as should White House press secretary Jay Carney, the former Time magazine political writer who is given to lecturing reporters on economics.

This isn’t the first time a CEA chair has been brought in to promote policies that run counter to their body of academic research. Christina Romer was the first CEA chair and helped to structure a stimulus that ran counter to previous work she’d done showing the weakness of stimulus and the benefits of tax cuts. There is certainly some supreme irony here. See the whole WSJ piece here.

See Reason on unemployment insurance here.