Opinion
Paul Ryan, U.S. congressman (R-WI), speaks at the SALT conference in Las Vegas in this May 16, 2014 file photograph. REUTERS/Rick Wilking/Files  Paul Ryan, U.S. congressman (R-WI), speaks at the SALT conference in Las Vegas in this May 16, 2014 file photograph. REUTERS/Rick Wilking/Files   

Lower Benefits, Higher Jobs

Photo of Larry Kudlow
Larry Kudlow
Senior Contributor, CNBC

This column co-written with Robert Sinche.

Neel Kashkari, the Republican candidate for governor of California, just recounted in the Wall Street Journal his week on the streets of Fresno posing as a homeless man looking for work. At the end of his op-ed, Kashkari lamented that he didn’t need a higher minimum wage, paid sick leave, or a health-care plan. What he needed was a job.

And Kashkari made the important point that all those government benefits, especially extended unemployment benefits, are work disincentives that may actually block job creation.

To be sure, there are signs that employment in the country is rising more rapidly these days. The February to July period was the first six-month stretch of consistent employment gains above 200,000 since 1997. And that came without any new programs from the federal government to “create jobs.” Even more surprising, those gains overlapped a quarter in which GDP actually contracted.

So what drove the increase? University of Chicago professor Casey Mulligan put his finger on it: “Major subsidies and regulations intended to help the poor and unemployed . . . reduce incentives for people to work and for businesses to hire.” And guess what happened when federal emergency job assistance ended? Job increases were the best in 17 years.

Economists tend to focus primarily on the demand for labor in analyzing employment trends, giving short shrift to the supply of labor. Indeed, given the harsh winter weather and first-quarter drop in real GDP, it’s hard to believe that the demand for labor increased significantly in February and March. But is there anything about the supply of labor that could explain the improvement in employment?

Well, there is a very good reason to believe that extending unemployment benefits to a maximum of 99 weeks in recent years held back the labor supply. Rather than taking a job, extended unemployment benefits made it easier for potential workers to lengthen their job searches, hold out for higher-wage positions, or just choose not to work.

However, supply-side theory would also suggest that as extended unemployment benefits expired at the end of last year — despite major handwringing from the president and Democratic leaders — workers would go back to work. And they did. Technically, this would be visible as an outward expansion of the supply-of-labor curve. Without the crutch of continued unemployment benefits, workers are willing to take jobs, even at a somewhat lower wage. They know that work is its own virtue.

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Now, if the demand for labor is steady, what would be the implications of an increased labor supply? Here, as the supply curve shifts, economic analysis would suggest that wages might fall somewhat, but the level of employment would increase. And guess what? Since the month after extended unemployment benefits expired, the number of employed workers has increased, the employment-to-population ratio has increased (59 percent in July versus 58.8 percent in February), and the civilian labor force has increased (to 156 million in July from 155.7 million in February). Average hourly earnings growth remains sluggish at only 0.2 percent per month over the last six months, but at least wages have risen modestly while employment gains have increased markedly.

The lesson here is that if you pay people not to work, you get less work. In fact, this is a universal problem. Record-breaking increases in recent years in food stamps, disability benefits, and various forms of welfare have reduced incentives to work and earn. But it’s clear over the first half of the year that lower unemployment subsidies have generated higher employment, which helps explain why employment growth accelerated and the unemployment rate fell another half percentage point when overall GDP growth slowed to a near 1 percent pace.