Get ready for the great unemployment benefits test

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There is excellent news as up to 18 states indicate that they're going to opt out of the federal expansion and addition to unemployment insurance.

It's excellent not because this will drive poorly paid workers back into working for their living. Rather, it's excellent because this is what economists so desire and all too often don't get: a true, natural experiment.

Our problem with the big economic questions, such as growth, employment, rising wages, and so on, is that we don't have much evidence. We know the details of a handful of economies for a few decades, but that's about it. Much of our other evidence about macroeconomics, those big questions covering the whole economy, is rooted in a series of guesses of varying quality. We can't rewind an economy and try again with a different set of policies.

Economists thus pray for natural experiments — for different policies being followed in sections of the same overall economy. With these experiments, it then becomes possible to tease out which is influencing what. Put another way, if we do X, then what Y or Z happens?

There are those (I'm among them) who suspect that paying people more to be unemployed than they'll get at work will lead to fewer people taking jobs. The $300 federal addition to unemployment insurance, plus the expansions of eligibility, means this does apply to some section of the labor force. Estimates vary because it all depends upon the wage structure of the particular state, what the normal unemployment insurance is like, then the addition of that federal top-up. Estimates range from 25% to 50% of everyone gaining by not working. Given that people are smart about their own interests, that's going to have an effect.

The latest JOLTS survey, which looks at job openings, had 8.1 million jobs open, the highest since the early 1990s. But the employment report has only 266,000 jobs added, with the unemployment rate unchanged at 6.1% and 9.8 million unemployed.

There's clearly something wrong here. Still, it's not a simple victory for those who share my view. After all, there are alternative explanations from the Left: that it is the inability to gain child care or other inefficiencies in the labor market that are causing this mismatch. In this story, reducing the payments to the unemployed simply makes lives worse without solving the jobs problem in the slightest.

This is where the joy of 18 states leaving the federal system comes in. Now, we'll have two sets of unemployment insurance policies operating in an economy in which all other policies and conditions (the growth and interest rates, the money supply, fiscal policy, and so on) are the same. It should be reasonably easy to then tease out, over the next few months, the effects of the different unemployment insurance policies. Expanded and increased unemployment insurance increases unemployment, or it doesn't. One way or the other, answers are coming.

We will have done an important experiment, we will have tested the two hypotheses, and then, we will know. Given the insistence that we must always follow the science, all of us should be celebrating.

Tim Worstall (@worstall) is a senior fellow at the Adam Smith Institute.





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