Unemployment Rate: High, But Why?

An extension of unemployment benefits may have unintended consequences for the unemployment rate.

By SHARE

If the employment outlook wasn't ugly already, Goldman Sachs economists said Friday they are now expecting the unemployment rate will hit 8.5 percent by the end of next year--and that it will likely slink higher in 2010.

In a note today, Brian Wesbury and Robert Stein of First Trust Advisors cover the "unintended consequences" of recent government moves, including the extension of unemployment benefits enacted in June.

From Wesbury and Stein (bold is mine):

Normally, jobless benefits are available for 26 weeks. The extension, which will last temporarily through early next year, added another 13 weeks. Following this, between June and October – in only four months – the unemployment rate has risen from 5.5% to 6.5%, a full percentage point.

What’s odd about the jump in the jobless rate is that it has been accompanied by an unusual increase in the number of people who say they are looking for work. Normally, when the unemployment rate leaps upward we see a decline in the share of the population either working or looking for work (what economists call the participation rate). Not this time.

In order to receive unemployment benefits, a person must be looking for work, so the extension of benefits is artificially coaxing many people who would no longer be in the workforce at all to say they are still looking for work, just so they can continue to collect benefits. The unintended consequence is that the unemployment rate is boosted faster and further than normal in a recession, making it more likely that policymakers further extend benefits, boosting the deficit and pushing up future tax payments.