Republicans have just given President Obama an early Christmas present. Will he take it? The Republican-controlled House of Representatives has passed a payroll tax cut bill. If it becomes law, it would reduce the duration of unemployment benefits, and require the unemployed to search for work and enroll in training and reemployment programs as a condition of receiving benefits.
These two provisions would significantly lower the unemployment rate in 2012, improving the president’s chances of winning a second term.
The bill would reduce maximum eligibility for unemployment benefits to 59 weeks from the present, extraordinary limit of 99 weeks. That would cause some of the long-term jobless to look for work sooner, and be less picky about jobs they would accept.
In normal economic times, the unemployed can collect benefits for 26 weeks. Yet, two-and-a-half years after the end of the recession, the duration of benefits is still 99 weeks.
The proposition that unemployment rises as eligibility for benefits lengthens has been accepted since the 1970s, starting with work by economists Arlene Holen and Stanley Horowitz, then at the Center for Naval Analyses, and first published in the Journal of Law and Economics.
Alan Krueger, the Princeton economics professor who this year became chairman of Obama’s Council of Economic Advisers, reached the same conclusion in his research.
The House bill would also make it more difficult to be eligible for benefits by requiring that applicants be actively seeking work or enrolled in a job-skills training program. More stringent enforcement of eligibility rules, i.e. work search requirements, also reduce unemployment.
In a phone conversation, Holen, now a senior fellow at the Technology Policy Institute, told me, “This is important because increasing entitlements increases the duration of unemployment. These are incontrovertible results.”
On Thursday, the Labor Department announced that first-time unemployment insurance claims declined to 366,000, the lowest since May 2008.
With the Republican-proposed changes, I believe that unemployment rates could decline by at least an additional percentage point over the next year, perhaps more.
We don’t have historical data to evaluate the precise amount, because America has never seen unemployment rates of 8 percent or higher for 34 months straight, as we have now.
Of course, this reduction would not happen immediately, but the downward trend could begin in January and lower the unemployment rate.
The main part of the bill, the payroll tax provision, would extend the payroll tax cut for employees through 2012 at its present rate of 4.2 percent on the first $110,000 of earnings, avoiding a return to its permanent rate of 6.2 percent.
The tax was reduced effective in January 2011 in an attempt to bolster take-home earnings and increase household spending. But this clearly was not enough to revive the flagging economy and significantly reduce the unemployment rate.
More than 13 million Americans are unemployed, the labor force participation rate declined to 64 percent in November, and 43 percent of the unemployed have been out of work for six months or longer.
Obama says that keeping the payroll tax at the lower level of 4.2 percent will create jobs, even though there’s little evidence that it did so in 2011.
Obama has threatened to veto the House bill. But, after huffing and hyperventilating, he could work with the Democratic-controlled Senate to accept the House bill and then sign it.
No president since Franklin Delano Roosevelt has been elected with an unemployment rate over 7.3 percent.
Obama would be wise to ever-so-reluctantly accept the Republicans’ gift. His protests would please Democrats now, and the declining unemployment rate would keep them happy in 2012.
Examiner Columnist Diana Furchtgott-Roth ([email protected]), former chief economist at the U.S. Department of Labor, is a senior fellow at the Manhattan Institute for Policy Research.
