On the research consensus on minimum wage and UI benefits

To follow up on your post, Mitch, JLF readers are familiar with the lack of controversy among economists about the negative effects of raising the minimum wage and extending unemployment insurance benefits.

Not long ago I compiled numerous examples (i.e., highlights in a long train of examples) of economists discussing the negative effects of the minimum wage on poor seeking employment. Examples will be numerous because, after all, there is widespread agreement among economists that raising the minimum wage has the unintended negative effect of harming the poor and hardest to employ. Harvard economist Greg Mankiw found that four out of five economists supported the proposition that “A minimum wage increases unemployment among young and unskilled workers.”

John Hood recently discussed a new study from economists at the New York Fed that

used an innovative technique for testing the effects of unemployment-insurance benefits on the labor market. They examined counties on the borders of states with differing UI policies. Because the economies of adjoining counties are otherwise similar, such a model has a good chance of isolating the effects of state policy from other causal factors.

What the Fed researchers found is that extending unemployment-insurance benefits results in higher levels of unemployment. In fact, “most of the persistent increase in unemployment during the Great Recession can be accounted for by the unprecedented extensions of unemployment benefit eligibility,” they found. While extended benefits tend to discourage recipients from accepting available jobs, the much-bigger problem is that extended benefits discourage the creation of new jobs — by holding wages above the market-clearing rate, for example, or perhaps by signaling to potential employers that payroll taxes will be rising in the future.

A reasonable interpretation of this and related econometric research is that by reducing the average duration of UI benefits, the North Carolina legislature has increased the incentive for employers to create jobs and for workers to fill them.

Paul Krugman, in his 2010 textbook on Macroeconomics written with Robin Wells, put it this way (granted, this was Krugman writing as a textbook economist, which differs wildly from his writing as an illogician for statism):

Public policy designed to help workers who lose their jobs can lead to structural unemployment as an unintended side effect. Most economically advanced countries provide benefits to laid-off workers as a way to tide them over until they find a new jobs. In the United States, these benefits typically replace only a small fraction of a worker’s income and expire after 26 weeks. In other countries, particularly in Europe, benefits are more generous and last longer. The drawback to this generosity is that it reduces a worker’s incentive to quickly find a new job. Generous unemployment benefits in some European countries are widely believed to be one of the main causes of ‘Eurosclerosis,’ the persistent high unemployment that affects a number of European countries.

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