Nancy Pelosi Claims Unemployment Insurance Creates Jobs. Is She Right?
Rep. Nancy Pelosi (D-CA) 14% said in a news conference Thursday that unemployment insurance (UI) stimulates the economy and creates jobs. For several weeks, many Democrats and some Republicans from states with high unemployment, such as Sen. Jack Reed (D-RI) 9% and Sen. Dean Heller (R-NV) 55%, have been advocating for an unemployment benefits extension.
Pelosi lauded the Senate for recently passing an unemployment benefits extension and called for the same course of action in the House.
Rep. Pelosi cited the idea, apparently posited by “some economists,” that “almost nothing does more as an immediate stimulus than unemployment insurance benefits.”
Economists at the Heritage Foundation have written about this claim, explaining:
The theory behind extending UI benefits as a stimulus assumes that unemployed workers will immediately spend any additional UI payments, instantly increasing consumption, boosting aggregate demand, and stimulating the economy.
This is not a new idea. Economists in the 1960s thought that unemployment insurance could function as an important automatic economic stabilizer. Empirical research in the 1970s demonstrated that this was not the case, and studies since then have concluded that unemployment insurance plays at best a small role in stabilizing the economy. Empirical research at the state level also finds that UI plays a negligible role in stimulating the economy.
Studies that have found that UI stimulates the economy effectively — such as studies by the Congressional Budget Office and economist Mark Zandi — rely on two faulty assumptions, thereby drawing a false conclusion:
They assume that unemployed workers spend every dollar of additional UI benefits almost immediately and that extending unemployment insurance does not affect workers’ behavior. In that case, every dollar spent on unemployment insurance adds a dollar to consumption without any direct effects on the labor market. Both assumptions are false.
Unemployment Insurance Prolongs Unemployment. One of the most thoroughly established results in labor economics is the effect of unemployment benefits on unemployed workers’ behavior. labor economists agree that extended unemployment benefits cause workers to remain unemployed longer than they otherwise would.
This occurs for obvious reasons: Workers respond to incentives. Unemployment benefits reduce the incentive and the pressure to find a new job by making it less costly to remain without work.
Citing the fact that 193 House members have signed a discharge petition, Pelosi said they hope the Speaker would take up the vote. She went on decry Republican leaders’ alleged efforts to stifle debate on this issue:
You know, we’re supposed to be a marketplace of ideas here — a place where you come and debate the issues of the day. Why can’t we have a debate on unemployment insurance… We’re supposed to find solutions. And one way to find solutions is to have the public see what the debate is on the subject.
If you were watching C-SPAN during Mrs. Pelosi’s remarks, you heard her side and her citation of studies that are based on faulty assumptions. She ignores data that indicate UI prolongs unemployment — hardly something beneficial to the economy.
It’s not clear that is conducive to a good debate on what she called “an emergency.”