As discussed in my previous post, our economy seems to be recovering quickly relative to other recessions, but employers are reporting increased hiring difficulties. This may be due to the changes in unemployment insurance (UI) and the effects on the labor market (the supply and demand of workers).
Generally, UI affects the labor market by changing job search behavior. UI decreases the gap in pay between working and not working. It creates an incentive for unemployed workers to take more time in their job searches, resulting in fewer job applications and longer jobless spells. On the other side of the labor market, the UI benefits that make it easier for workers to put off job searches and be more selective also make it more difficult and costly for businesses to hire, which reduces the incentive to post job openings. Ultimately, UI can damage both sides of the labor market.
Providing money to help someone between jobs isn’t inherently a bad thing, especially during difficult economic times. In fact, one justification for having an unemployment insurance system at all is that the added time spent searching for a job leads to the possibility of a higher-quality job fit, which has stabilizing effects on consumer spending. However, excessive generosity or duration of UI benefits can hamper the economic recovery following a recession.
Researchers have cited the extensions of unemployment benefits as playing a role in the slowest job recovery on record—the aftermath of the Great Recession—and other jobless recoveries. Similarly, eventual cuts to UI benefits after periods of extensions have led to large influxes of workers and decreases in unemployment levels.
All this research on the relationship between UI and the labor market makes me question whether our UI policy during this economic downturn has been optimal. The recent extension of unemployment benefits with the $300 weekly supplement may threaten to impede the pace of our current recovery as UI has in the past. Governor Parson has even decided to end Missouri’s participation in the federal pandemic unemployment benefits beginning on June 12th, saying that it’s time to get people back to work. The complicated topic of UI and our current recovery with be discussed in the next blog in this series.
