Does welfare make US unemployment worse?

With the sharp increase in the unemployment rate during the recent recession, Congress enacted a series of unemployment insurance extensions, allowing jobless individuals to collect up to 99 weeks of benefits in some states. Even though the labour market has been improving, there are still nearly three unemployed workers for each job opening, and the average duration of unemployment is currently 40 weeks – longer than the 26 weeks of benefits that an unemployed worker is normally eligible to collect (BLS 2013). With the sharp rise in the unemployment rate over the recent recession, Congress approved additional weeks of benefits by authorising the Emergency Unemployment Compensation program, which added up to 53 weeks of coverage to regular and extended benefits for a combined total of 99 weeks in states with the highest unemployment rates.

Unemployment compensation prolonging unemployment?

The increased availability of unemployment compensation has been identified by many economists as an important source of the persistently high rates of unemployment. Evidence from recent work by Ghayad and Dickens (2012) confirmed that the increase in job openings relative to unemployment – depicted by the outward shift of the Beveridge curve – has taken place only among the long-term unemployed, suggesting a possible role for extended unemployment insurance benefits.

New research

In a new paper, I uncover new facts that emerge from disaggregating the unemployment rate into different categories by reason for unemployment (Ghayad 2013). According to the classification scheme of the unemployment insurance programme, an unemployed worker’s reason for unemployment is a major factor in determining whether or not the worker is eligible to collect unemployment benefits. Job losers, who are often qualified to receive unemployment benefits, constitute only about half of the total unemployed (53% in January 2013), while the remaining portion comprises job leavers, new entrants, and unemployed re-entrants, who are generally not eligible to receive unemployment benefits.

If part of the shift is explained by unemployed workers who are ineligible to collect benefits, then the Beveridge curve will not shift back to its pre-recession position when benefits for the long-term unemployed are discontinued.

In order to estimate which groups account for the breakdown in the vacancy and unemployment relationship, I decompose the recent deviation from the Beveridge curve into different parts, using data on job openings from the Job Openings and Labor Turnover Survey and unemployed persons by reason of unemployment obtained from the Current Population Survey.

Results

The findings put an upward bound on the extent to which the increase in unemployment relative to job openings is due to reduced search effort caused by the extended availability of unemployment insurance.

Figure 1 displays the Beveridge curve with the actual unemployment rate (total unemployed as a percentage of the labour force) on the horizontal axis and the job openings rate (imputed job openings as a percentage of the labour force) on the vertical axis, for the period starting January 2001. The solid black line – a fitted Beveridge curve – represents an estimate of the relationship between job openings and unemployment, using data through August 2009, the time before the vacancy-unemployment relationship began to shift outward. The blue dots are observations from January 2001 to August 2009. The red diamonds are observations for the subsequent months, running up to January 2013.

The estimated Beveridge curve fits the data well up to August 2009. However, after 2009 the unemployment rate is consistently above what would be expected given the old Beveridge curve. For example, given the September 2009 job openings rate, the actual unemployment rate was 1.10 percentage points above the one implied by the fitted curve. I refer to this deviation as the Beveridge curve gap.

Figure 1. Monthly vacancy and unemployment rates Jan 2001 – Jan 2013

Notes: the blue dots are observations for 2001:m1–2009:m08. The red diamonds are the observations for 2009:m09–2013:m01. The black curve is a fitted estimation using data prior to September 2009. For a given job openings rate, the gap is calculated by measuring the deviation of the actual unemployment rate from that implied by the fitted curve.

Sources: Job Openings and Labor Turnover Survey and Current Population Survey.

The deviation of the points starting in September of 2009 from the stable Beveridge curve has been attributed by many economists to factors such as a rise in the mismatch between the skills of the unemployed and the skills desired by employers, or to the supplemental and extended unemployment insurance benefit programmes that were designed to attenuate the hardships of involuntary job losses over the course of the Great Recession.

Which groups are shifting the Beveridge curve?

There are many reasons why individuals become unemployed, and their experiences with unemployment vary widely. The Current Population Survey divides these myriad reasons into four major categories. People become unemployed because they either lose their previous job (job losers), quit their previous job voluntarily (job leavers), enter the labour force to look for work for the first time (new entrants), or re-enter the labour force after being out of it for a while (re-entrants).

Following Valletta and Kuang (2010), one can group data from the Current Population Survey on the unemployed by reason for unemployment into two categories: job losers, who may be eligible to collect regular and extended benefits, and all other unemployed persons (job leavers, new entrants to the labour force, and unemployed re-entrants), almost all of whom are ineligible to collect such benefits. Job losers are divided in the Current Population Survey into two groups: those on temporary layoff and those on a permanent layoff; both are qualified to collect regular, extended, and emergency unemployment insurance benefits. In contrast, unemployed persons who are job leavers, new entrants, and unemployed re-entrants are not normally eligible to collect regular or extended benefits but are classified as unemployed according to the CPS. One exception is re-entrants who were job losers before leaving and subsequently re-entering the labour force. These people may be eligible to collect unemployment benefits if they are still within their period of eligibility.

Each of the two categories of the unemployed can be expressed as a proportion of the entire civilian labour force; the sum of the two rates thus equals the unemployment rate for all civilian workers.

In Figures 2 and 3 below, I fit empirical Beveridge curves for job leavers, new entrants, and re-entrants (Figure 2), as well as job losers (Figure 3). In each figure, I estimate the deviation in the unemployment rate of each group from its fitted curve for the period September 2009 onwards. A rough calculation suggests that job leavers, new entrants, and unemployed re-entrants – most of whom are not eligible for unemployment benefits – have contributed approximately 48.5% of the aggregate gap in January 2013, while job losers accounted for the remaining part during the same month.

Figure 2. Monthly vacancy and unemployment rates using job leavers, new entrants and unemployed reentrants Jan. 2001–Jan 2013

Notes: the graph plots the job openings rate versus the unemployment rate using job leavers, new entrants, and re-entrants. The blue dots are the observations for 2001:m1–2009:m09. The red diamonds are the observations for 2009:m09–2013:m01. Data are seasonally adjusted monthly rates. The black curve is a fitted estimation using data prior to September 2009. For a given job openings rate, the gap is calculated by measuring the deviation of the actual unemployment rate from that implied by the fitted curve.

Sources: Job Openings and Labor Turnover Survey and Current Population Survey.

Figure 3. Monthly vacancy and unemployment rates using job losers Jan 2001–Jan 2013

Notes: the graph plots the vacancy rate versus job losers as a fraction of the entire labour force. The blue dots are the observations for 2001:m1–2009:m08. The red diamonds are the observations for 2009:m09–2013:m01. Data are seasonally adjusted monthly rates. The black curve is a fitted estimation using data prior to September 2009. For a given vacancy rate, the gap is calculated by measuring the deviation of the actual unemployment rate from that implied by the fitted curve.

Sources: Job Openings and Labor Turnover Survey and Current Population Survey.

Conclusion

Exploration of the evolution of job openings and unemployment using recent data on unemployed persons decomposed by their reason for unemployment, which determines their eligibility to collect benefits, suggests that up to half of the increase in the unemployment rate relative to the fitted Beveridge curve is explained by job leavers, new entrants, and re-entrants – those who are ineligible to collect unemployment benefits.

Because unemployed job seekers who do not qualify to receive benefits compete for jobs with unemployed job losers who are eligible to collect unemployment insurance, an unattractive vacancy that is refused by a job loser is likely be grabbed quickly by a new entrant or unemployed re-entrant who is not subject to any incentive effects. However, the evidence from the decompositions suggests that the increase in the unemployment rate relative to job openings will persist when unemployment-benefit programmes expire.

Author: Rand Ghayad PhD candidate, Northeastern University.

Image: Job seekers wait on an unemployment office in New York REUTERS/Lucas Jackson