October 05, 2012
Casey Mulligan takes another shot at explaining the downturn as a decision by millions of people to stay at home and collect government benefits (joining the 47 percent) rather than work, in response to the increased generosity of programs like unemployment insurance and food stamps under the Bush and Obama administration. I don’t have time to deal with all the points that Mulligan raises, but it is worth focusing on one implication of his story.
Not everyone was in a position to gain from these benefits. For example, young workers just entering the labor force with no work history would not be eligible for unemployment insurance. Also, if they have no children they will probably not eligible for food stamps or other government benefits. In other words, this group of workers would not have seen any increased disincentive to work as a result of any changes in benefits over the last 5 years.
For these workers the increase in benefits for other workers would imply somewhat of a bonanza in Mulligan’s world. It would effectively pull many of their competitors out of the labor force. Think of a situation where your employer just offered a very generous early retirement plan to everyone who had more seniority to you at your workplace. With these people out of the way, there will be great opportunities for promotions and pay increases.
The same would situation would exist if we believe Mulligan’s supply-side theory. This should mean that workers who stay in the workforce have much lower unemployment rates that we would have otherwise expected (i.e. lower than their 2007 levels) and higher wages. I haven’t looked closely at the data, but this doesn’t seem to fit the facts. The sharpest rise in unemployment rates or fall in employment rates has been among the young workers who are likely not eligible for the benefits that have become more generous. (The minimum wage story won’t help here, their employment rates have not risen as the its real value was eroded inflation.) In other words, this trip to the supply side again looks like a dead end.
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