My formula or your lying eyes

By Dave Anderson:

Imagine we are in a world of 6.8% U-3 unemployment in the United States.  What would we see in it?

I imagine that we would see lower levels of people claiming disability payments as what was a marginal but tolerable condition that could be accomdated in a decent job is better than not working at all.  

I imagine that we would not see record youth unemployment.

I imagine that we would not see a record number of people applying for graduate school and law school.

I imagine that the US Army would not be able to raise their recruiting standards back to pre-Bush standards despite the fact that they are still fighting an increasingly unpopular and strategically vague war. 

I imagine that I would have received more than 5 interviews from 200 resumes in the past year, and gotten at least a polite, thanks for no thanks from more than 25 resumes that did not lead to interviews.  

I imagine that the 4 week trailing average of new claims for unemployment would be consistently below 350,000 and a significant number of net new jobs in both the private and public sector had been consistently created over the past year.

I imagine that work-force participation rates would be stable or slightly increasing instead of falling.

I imagine that we would be in a world where people are trying to enter the labor market because there are a decent number of jobs that pay decently available and employers would act as if there was some scarcity for some types of workers.  We don't live in that world.

Economist Robert Barro in a hack piece at the Wall Street Journal believes we are living in this world except for one thing; too much unemployment insurance:

To get a rough quantitative estimate of the implications for the unemployment rate, suppose that the expansion of unemployment-insurance coverage to 99 weeks had not occurred and�I assume�the share of long-term unemployment had equaled the peak value of 24.5% observed in July 1983. Then, if the number of unemployed 26 weeks or less in June 2010 had still equaled the observed value of 7.9 million, the total number of unemployed would have been 10.4 million rather than 14.6 million. If the labor force still equaled the observed value (153.7 million), the unemployment rate would have been 6.8% rather than 9.5%.

He gets his numbers from the BEA and than processes them through his posterior, forgetting that 1983 was a simple Fed recession as the Fed was trying to smack down inflation by jacking up rates.  Now we are in a financial crisis recession where we are operating at the zero-bound on inflation.  He also disregards actual evidence in place of his Econ 101 ramblings. 

The San Fransisco Federal Reserve wanted to figure out what the actual impact of unemployment insurance was on the duration of unemployment.  They took a sample of people who had unemployment benefits and matched that sample with a sample of people who were not eligible for benefits.  They matched on demographic and educational characteristics.  The finding was consistent with a hypothesis that the labor market sucks, and not that the problem is that unemployment benefits rare sufficiently high and long lasting to make unemployment an attractive long term proposition.  

Although economists have shown that extended availability of UI benefits will increase unemployment duration, the effect in the latest downturn appears quite small compared with other determinants of the unemployment rate. Our analyses suggest that extended UI benefits account for about 0.4 percentage point of the nearly 6 percentage point increase in the national unemployment rate over the past few years. It is not surprising that the disincentive effects of UI would loom small in the midst of the most severe labor market downturn since the Great Depression.

If we lived in a world where there otherwise would be 6.8% unemployment, teens and young adults would have jobs, the disability rolls would be stable or shrinking, the Army would have trouble meeting quality standards even if unemployment insurance was guaranteed to last 99 weeks.  Those labor market segments are not covered by unemployment insurance and they serve as one source of marginal labor.