Amherst Magazine

Its Strength Is Its Weakness

Interview by Peter Rooney

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Professor Walter Nicholson

As the Great Recession continues, one of its defining characteristics is persistent unemployment. Walter Nicholson, the Ward H. Patton Professor of Economics, is an expert on unemployment insurance systems, which not only help laid-off workers but also prop up economies by helping to replace lost purchasing power. He recently spoke with Amherst magazine.

Q  What are the strengths and weaknesses of our current unemployment insurance system?
A  I think the strength is that it’s pretty universal. It covers almost everyone who loses a job, which means lots of
unemployed workers are covered—about 6 to 7 million in all. The problem is that its strength is its weakness, because it’s only oriented toward people who lose jobs. Other causes of unemployment are not covered.

Q  Such as?
A  The main other causes of being unemployed are if you’ve entered the labor force without having had a job previously, either as a young person or as someone who’s re-entered after not having had a job for several years. Other parts of the labor force not covered include self-employed people and some agriculture jobs.

Q  The national unemployment rate was 10 percent in December. How significant is that figure?
A  The only time we’ve been that high in the post-World War II period was in the early ’80s. We were going along at a 3- or 4-percent rate and suddenly it ballooned to 10, so that’s pretty significant.

Q  What does the 10-percent figure count, and what does it miss?
A  The standard definition of unemployed is the one provided by the U.S. Census. It has two criteria: (1) you don’t have a job and (2) you’re looking for work. Both of those criteria are controversial. You’re not counted as unemployed if you’re working only a few hours a week while you’re looking for work. And you’re not counted if you don’t have a job and have given up looking for work. Those people are termed discouraged workers. If you depart from those definitions, you get into all sorts of conceptual problems. For example, if you say anyone without a job is unemployed, that’s clearly wrong, because of the 60 million retired people in the U.S. So you need some test of whether you’re in the labor force or not.

Q  If you could apply one major finding from economic theory to the unemployment insurance system to improve it, what would it be?
A  Well, there are two. One is to acknowledge the incentive effects of the benefits structure and adjust it accordingly. For example, extensive research shows that people stay unemployed longer if they receive benefits longer. We’re now providing 100 weeks of benefits, and that’s uncharted territory. The other is the incentive effect of the tax structure. Firms appear to be much more willing to lay off workers than they used to be. Maybe at the government level we should be concerned about that and try to provide some incentive for employers not to lay off workers so readily in a recession. Making firms pay more of the actual cost of unemployment insurance would be a way to do that.

Q  Do you agree with economists who predict that we may experience a jobless recovery and that many of the jobs that have been lost will not reappear?
A  Job recovery always comes late in a recession, because firms don’t start rehiring until the recession is pretty well over. I don’t see any historical reason to worry about the return of jobs. It may be slow, but once the private sector starts moving again, jobs will come back.    

Photo by Mark Yarchoan '07