Thursday, July 15, 2010

Does Unemployment Insurance Have Macro-Economy Benefits?

A comment I posted on capitalgainsandgames blog, "Sense and Nonsense About Extending Unemployment Insurance" posted by Andrew Samwick:
In the aggregate, to continue to consume, the unemployed can use savings (including decreasing any additions to savings). Additionally, they can borrow from relatives and friends, sell assets (sell one of their two or three cars and become a one car family, sell their home for a positive amount and become a renter or move in with relatives, cash in a whole life insurance policy, etc.) or while eligible spend unemployment insurance benefits.

Since unemployment benefits are a fraction of workers' previous wages and do not completely replace workers' wages, all the alternatives listed above to continue consumption cause a decline in consumption or a decline in incremental savings. It is unlikely that unemployment insurance is enough to continue a mortgage payment.

Unless one shows that the marginal effect, in the aggregate, of consumption after receiving unemployment benefits is greater than consumption using private alternatives, such as savings, unemployment benefits do not increase aggregate economic consumption and do not benefit the macro-economy.

In individual cases, unemployment payments may decrease hardship, where borrowing from relatives or friends is not available. However, one must remember that there are hardship alternatives in the US for destitute families, such as food stamps, Medicaid, etc, and it is unclear what the incremental benefit of unemployment insurance payments is to the unemployed.

It seems more of a class distinction. Unemployed workers can claim they are receiving unemployment benefits instead of government assistance. It may be a distinction without a difference to the macro-economy.


  1. I think this will help as the unemployed people will get a small portion of help so that they can survive. In addition government have to take some major steps so that this won't go negative.