A prominent economist has found that expanding the social safety net, a key factor to President Barack Obama’s economic agenda, has nearly doubled job losses.
University of Chicago Prof. Casey Mulligan, author of the soon-to-be-released The Redistribution Recession, found that without the rapid increase of the social safety net during the economic crisis, unemployment per capita would have increased by 4 percentage points, half of the 8 point jump the U.S. experienced.
“The less painful it is to be without a job, the less reasons employees and employers have to work together to save a job,” Mulligan said. “By making the safety net more generous, you’re going to have more businesses close up because of higher costs, and you’re going to see employees who will refuse to work if their wage is going to be less than their unemployment.”
The stimulus provided an $80 pay bump in all food stamp benefits and allowed laid-off workers to remain on unemployment insurance up to 99 weeks, 26 of which are paid in large part by employers. The impact of such policies was immediate. In 2009, the average unemployed household took in $16,000 in benefits—a 60 percent increase from the pre-recession payout, according to Mulligan.
The benefits came at a price. The effective marginal tax rate for low-income households—the rate at which each additional dollar in income is taxed—rose from 40 percent in 2007 to 48 percent in 2009.
The increased costs to the labor market provided unemployed workers with little incentive to get back on their feet immediately, and deterred current employees from taking pay cuts in a down economy, according to Mulligan.
“When the White House pitched the so-called stimulus bill, they portrayed unemployment and food stamps as free and said they would make the labor market better,” Mulligan said. “That is not only wrong, it is dishonest to those in the labor market who need jobs.”
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