I have a new bet with Kurt Mitman, a PhD candidate at the University of Pennsylvania, about unemployment benefits. Kurt, like some other economists, believes that unemployment benefits are holding down employment in the U.S. by paying people not to work. He has written a paper with three coauthors that examines cross-state evidence and concludes that unemployment benefits are a significant disincentive to work.
It now looks like there is a very good chance that Congress will fail to extend unemployment benefits. Using the results from his paper, Kurt predicts that this will cause a lot more Americans to go get jobs. I have decided to bet against this happening. Because it's possible that the expiration of unemployment benefits will simply lead to a bunch of people no longer claiming to be looking for work (but still not looking for work), we made two separate bets on two separate numbers: A) the unemployment rate, and B) the employment-to-population ratio. Kurt bets that more people will get work, so unemployment will fall while employment rises. Being a general skeptic about the importance of policy, I bet that nothing much will happen, so that both numbers stay the same. Recent evidence from North Carolina suggests we might both be wrong - expiring benefits there seem to have led to a fall in unemployment and a corresponding rise in dropouts from the labor force.
Since Kurt is still an impoverished grad student, we kept the size of the bets small - one pizza per bet. As with my bet with Brad DeLong, Miles Kimball is officiating. Here are the official terms of the bet, as stated by Kurt:
We are interested in the December 2014 jobs report, to be released in January 2015. The variables of interest are the unemployment rate and employment to population ratio. Call these Ut and EtAnd this time, just for fun, I promise not to hedge my bet with a side bet.
The prediction of my model is that unemployment will be 5.2% on that date, and an increase in the employment to population ratio of 2 percentage points, call these Um and Em.
We are interested in the difference between the headline rate on the last month when extended unemployment benefits were in effect. As of right now that is the December 2013 jobs report numbers, 6.7% for unemployment and 58.6% for employment population ratio. If benefits get extended again, it would be the last month that they are in effect. Call these U0 and E0.
I win the bets if U0-Ut > (U0-Um)*t/24
Et-E0 > (Em-E0)*t/24
where t is the months between the final month when extended benefits were in effect and December 2014.
For example, if benefits do not get re-extended, t=12, I win if:
6.7%-Ut > (6.7% - 5.2%)*12/24
Ut < 5.95%
Basically, the fall in U or increase in E is "pro-rated by the number of weeks.
If benefits were to be re-authorized through March 2014, I would win if
U_march - Ut > (U_march - 5.2%)*9/24
And we are betting one large pizza for each variable.