Standard micro theory will tell you that “unemployment insurance” (UI) may have the unintended consequence of providing an incentive to work fewer hours. Yet, typical micro students look at you in disbelief when they hear this. After all, what kind of meanie-person can you be if you even pose this question–how come you don’t care for the unemployed? Granted, UI may have a first-order effect in helping the unfortunately unemployed in the short-run but this does not preclude the disincentive to work in the long-run… Here is some evidence (definitely an example I will use in my future micro class):
The Long-Term Effects of a Generous Income Support Program:
Unemployment Insurance in New Brunswick and Maine, 1940-1991
by Peter Kuhn, Chris Riddell
Using data spanning a half century for adjacent jurisdictions in the U.S. and Canada, we study the long-term effects of a very generous unemployment insurance (UI)program on weeks worked. We find large effects. For example, in 1990, about 6 percent of employed men in Maine’s northernmost counties worked fewer than 26 weeks per year; just across the border in New Brunswick that figure was over 20 percent.
According to our estimates, New Brunswick’s much more generous UI system accounts for about two thirds of this differential. Even greater effects are found among women and less-educated men. We argue that our longer-run, crossnational perspective generates more substantial estimates of program effects because it captures workers’ abilities to make a wider variety of adjustments to programs they expect to be permanent.