Monday, January 26, 2015
Results of my unemployment bets with Kurt Mitman
Back in February, I made a bet with Kurt Mitman, who wrote a theoretical paper about unemployment benefits and unemployment. Based solely on my prior that "all macro models are massively misspecified," I bet that both unemployment and the employment-to-population ratio would remain flat from December 2013 through December 2014. Kurt bet on the point estimates of his model. So it was:
Employment-to-population ratio: 58.6%
Employment-to-population ratio: 60.6%
Employment-to-population ratio: 59.2%
Result: We split the bets. My miss on unemployment was 1.1% to Kurt's 0.4%, so Kurt wins that one. My miss on employment-to-population ratio was 0.6% to Kurt's 1.4%, so I win that one.
As per the terms of the bet, Kurt and I will each buy each other a pizza dinner. However, since Kurt now works in Europe, it may be awhile before we can make good!
Anyway, in retrospect, it was a little careless of me to bet on "no change" for unemployment, which was clearly trending downward as of January 2014:
And it was probably a little careless of Kurt to bet on employment-to-population ratio when his model didn't model the margin between unemployment and out-of-the-labor-force, or the margin between employment and out-of-the-labor-force.
But anyway, as a follow-up, Kurt is co-author on a new paper that gives an empirical estimate of the effects of the termination of extended unemployment benefits. Looking at differences across state borders (and between neighboring counties in different states), they find that the termination of benefits increased the total number of employed people by 1.2%. That doesn't sound huge, but it's actually 1.8 million jobs. Whether it qualifies as an employment "miracle", as the paper's title claims, is up for debate, but 1.2% is not nothing. (Of course, I'm accepting the paper's result at face value; some other studies have yielded very different results.)
So although unemployment benefits don't seem to have been the main reason for the huge decline in U.S. employment since 2008, and their effect isn't as big as in Kurt's original model, they were indeed a non-trivial factor. There were a substantial number of people out there who were being paid not to work, and are now back working again.
Mike Konczal has a blog post in which he reviews some evidence regarding UI extensions and unemployment. The other studies that examined this question looked not at states or counties but at individuals. It would take a lot of effort for me to compare the two methodologies in detail, so I won't. The other studies find that UI extensions decreased employment by about 0.1 to 0.5 percentage points, which is much smaller than the estimate of the recent paper on which Mitman is a co-author. (A 2011 paper by Makoto Nakajima, however, finds effects close to those Mitman finds).
But I think the bigger point is this. The employment-to-working-age-population ratio fell by a bit little over 5 percentage points in the Great Recession, and since then has recovered by a little over 3.5 percentage points. Mitman and his co-authors estimate that UI extensions were responsible for about 17% of the drop, or about 26% of the recovery. The other commonly cited paper estimates that UI extensions were responsible for around 5.7% of the drop, and 8.7% of the recovery.
Looking at this range, it's clear that UI extensions do hurt employment, but were not the dominant factor in the recent recession.