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ment (half of the total of forty weeks that the twenty-one people are out of work) would be accounted for by
spells lasting twenty weeks.
Something like this example applies in the real world. In November 1991, for example, 40 per cent of the
unemployed had been unemployed for less than five weeks, but 15 per cent had been unemployed for six or
more months.
To fully understand unemployment, we must consider the causes of recorded long-term unemployment.
Empirical evidence shows that two causes are welfare payments and unemployment insurance. These govern-
ment assistance programs contribute to long-term unemployment in two ways.
First, government assistance increases the measure of unemployment by prompting people who are not
working to claim that they are looking for work even when they are not. The work-registration requirement for
welfare recipients, for example, compels people who otherwise would not be considered part of the labor force
to register as if they were a part of it. This requirement effectively increases the measure of unemployed in the
labor force even though these people are better described as non-employed – that is, not actively looking for
work.
In a study using state data on registrants in Aid to Families with Dependent Children and food stamp pro-
grams, my colleague Kim Clark and I found that the work-registration requirement actually increased measured
unemployment by about 0,5 to 0,8 percentage points. In other words, this requirement increases the measure of
unemployment by 600,000 to 1 million people. Without the condition that they look for work, many of these
people would not be counted as unemployed. Similarly, unemployment insurance increases the measure of un-
employment by inducing people to say that they are job hunting in order to collect benefits.
The second way government assistance programs contribute to long-term unemployment is by providing an
incentive, and the means, not to work. Each unemployed person has a "reservation wage" – the minimum wage
he or she insists on getting before accepting a job. Unemployment insurance and other social assistance pro-
grams increase that reservation wage, causing an unemployed person to remain unemployed longer.
Consider, for example, an unemployed person who is used to making $10.00 an hour. On unemployment
insurance this person receives about 55 per cent of normal earnings, or $5,50 per lost work hour. If that person
is in a 15 per cent federal tax bracket, and a 3 per cent state tax bracket, he or she pays $0,99 in taxes per hour
not worked and nets $4,51 per hour after taxes as compensation for not working. If that person took a job that
paid $10,00 per hour, governments would take 18 per cent for income taxes and 7,5 per cent for Social Security
taxes, netting him or her $7,45 per hour of work. Comparing the two payments, this person may decide that a
day of leisure is worth more than the extra $2,94 an hour the job would pay. If so, this means that the unem-
ployment insurance raises the person's reservation wage to above $10,00 per hour.
Unemployment, therefore, may not be as costly for the jobless person as previously imagined. But as Har-
vard economist Martin Feldstein pointed out in the seventies, the costs of unemployment to taxpayers are very
great indeed. Take the example above of the individual who could work for $10,00 an hour or collect unem-
ployment insurance of $5,50 per hour. The cost of unemployment to this unemployed person was only $2,94
per hour, the difference between the net income from working and the net income from not working. And as
compensation for this cost, the unemployed person gained leisure, whose value could well be above $2,94 per
hour. But other taxpayers as a group paid $5,50 in unemployment benefits for every hour the person was unem-
ployed, and got back in taxes only $0,99 on this benefit. Moreover, they forwent $2,55 in lost tax and Social
Security revenue that this person would have paid per hour employed at a $10,00 wage. Net loss to other tax-
payers: $7,06 per hour. Multiply this by millions of people collecting unemployment, each missing hundreds of
hours of work, and you get a cost to taxpayers in the billions.
Unemployment insurance also extends the time a person stays off the job. Clark and I estimated that the ex-
istence of unemployment insurance almost doubles the number of unemployment spells lasting more than three
months. If unemployment insurance were eliminated, the unemployment rate would drop by more than half a
percentage point, which means that the number of unemployed people would fall by over 600,000. This is all
the more significant in light of the fact that less than half of the unemployed receive insurance benefits.
Another cause of long-term unemployment is unionization. High union wages that exceed the competitive
market rate are likely to cause job losses in the unionized sector of the economy. Also, those who lose high-
wage union jobs are often reluctant to accept alternative low-wage employment. Between 1970 and 1985, for
example, a state with a 20 per cent unionization rate, approximately the average for the fifty states and the Dis-
trict of Columbia, experienced an increase in unemployment of 1,2 percentage points relative to a hypothetical
state that had no unions. To put this in perspective, 1,2 percentage points is about 60 per cent of the increase in
normal unemployment between 1970 and 1985.
