Wednesday, December 17, 2008

Moral hazard and unemployment benefits

For a long time conservative and free-market economists, especially in the US, have opposed unemployment insurance on the grounds that it promotes moral hazard and disincentivizes people from hunting for jobs and even shirk work. In the face of this spirtited opposition, successive governments in the US has cut back on unemployment benefits and its duration. But two studies - in the UK and US - come up with interesting findings to the contrary.

Chris Dillow draws attention to a study by Barbara Petrongolo, which uses data from the Jobseekers Allowance Program in the US and finds that though "tougher search requirements did succeed in getting people off unemployment benefits initially, it was not successful in getting people into new, lasting jobs". She found that the people subjected to the tougher rules worked fewer hours 12 months later, and those that were in work earned less than those who had been subject to the less stringent Unemployment Benefit rules. Stricter beenfit regimes tempted people to take the first job that came along, rather than wait for ones for which they were more suited. The upshot was that people went into low-earning work, or jobs that didn’t last. Also, many of those who left unemployment either went onto incapacity benefit or into the black economy.

Tim Harford points to a recent NBER working paper by Raj Chetty which claims that more generous unemployment insurance appears to lead to greater unemployment not due to moral hazard and people ducking work, but because the beenfits give a cushion to those looking for jobs from having to rush into an unsuitable job. His research suggests that those without their own cash reserves are using unemployment benefits to buy themselves time to find the right job. Therefore, while unemployment benefits do encourage unemployment in the short term, that may not be a bad thing!

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