Saturday, November 17, 2012

A different take on labor force shrinkage

Just ran across a couple of references to Chicago economist Casey Mulligan's new book on the Great Recession: The Redistribution Recession.  In light of yesterday's post, I feel obligated to post on Mulligan's explanation of why the labor force has shrunk so much.  Mulligan puts much of the blame on the stimulus package itself for eroding the incentives to work.  Expansions in the availability of unemployment benefits, housing assistance and food stamps explain as much as half of the decline in employment and hours, Mulligan argues, by eroding the payoff from working.

Here is an example from a Forbes piece by John Goodman I saw yesterday: 
Mulligan gives the example of a two earner couple — each earning $600 a week. After the wife gets laid off she obtains a new job offer, paying $500 a week. But after deducting taxes and work related expenses her take home pay would be $257. Since untaxed unemployment benefits total $289, clearly she is better off not working.
I have not had the chance to read Mulligan's book, so it is hard for me to evaluate his analysis and compare it to Robert Moffitt's work that I cited in yesterday's post.  WSJ reviewer Stephen Moore puts Mulligan's work in perspective by saying
By the way, Mr. Mulligan doesn't challenge the claim that a surge in unemployment benefits, food stamps and other subsidies may have been desirable to prevent hunger or severe poverty for out-of-luck families or unemployable people traumatized by the recession. He simply and inconveniently notes that, though increasing subsidies may be compassionate in the short term, it comes with costs in the long term that eventually cause more hardship rather than less. 

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