What I am about to say may not be very politically correct. It may even sound heartless.
The “Stimulus” Package (or as some like to refer to it, the “We’re All Socialists Now” Act of 2009) includes a hefty increase in unemployment benefits. It increases weekly benefits by $25 and extends coverage for those scheduled to run out in March through the end of 2009. While that may sound like an uncontroversial idea on the surface, it may hinder our long-term recovery.
In a soon to be published article by economists Maria Minniti, Professor and Bobby B. Lyle Chair in Entrepreneurship at SMU Cox School of Business, and her German co-author Philipp Koellinger find that increasing unemployment benefits also reduces the incentive of people to start a new business. In fact, their study reveals that unemployment benefits reduce start-ups not only from people that lack other employment options (often called necessity-entrepreneurs), but also from people who plan to start innovative ventures with high growth potential for the future. This is particularly worrisome given the “multiplier effect” high potential start ups have on the economy.
Koellinger and Minniti’s analysis showed that increasing unemployment benefits by 0.1 percent of GDP reduces the share of entrepreneurs in the population by roughly 3%. The USA currently spends about 0.3% of GDP on unemployment benefits and 7.7% of the adult population are currently in the process of starting a new business. If the government were to decide raising unemployment benefits to 0.4% of GDP, the rate of entrepreneurs would decrease from roughly 7.7% to 7.4%. Although that may not sound like a big number, given a population of 200 million, it would mean a loss of 600,000 start-ups. On average, every new entrepreneur employs 2 other people. Hence, an additional 1,200,000 jobs would be lost – which is roughly the adult population of Houston. These are lower bound estimates that do not take other indirect effects of unemployment benefits on the number of jobs into account, such as established firms hiring less because of decreased sales or higher social security costs.
Are unemployment benefits bad? Koellinger and Minniti’s position is that unemployment benefits are important, but governments and voters should take the indirect costs of these benefits into account when deciding how generous they want their unemployment benefits to be. I agree. The unintended consequences may leave us much worse off over the intermediate and long term.
Recessions tend to foster entrepreneurs, albeit some of them more “accidental” entrepreneurs than others. We may be greatly reducing the number of these new ventures during the current recession through expansion of unemployment benefits.
These are easy assumptions/conclusions to arrive at when you are sitting behind a desk, and your biggest worry is what bank to deposit your money in. The reality for most people collecting unemployment, however, is without that money they and thier children are going to go hungry or become homeless, if they are still lucky enough to have a home. Maybe Mr. Cornwall could open his home to an unemployed/homeless family and allow them to stay there for a while, instead of critcizing the program that is essentially thier lifeblood.
Easy for this spoiled author to say. It’s based on other spoiled rotten kids who spent their 20, 30s and 40s in college on old money, to make this study.
Try actually working for once. Instead of just forming an uppercrust opinion.
W/O Unemployment benefits, I would be dead by now. I was lucky to find a decent job when times were great. That jobs salary went all to expenses of living and I worked about 60 hours a week. I couldn’t save a dime and sometimes had to go in debt to fix my vehicle just to get to work. How did I pay off the debt? By skipping meals!
Anyone who has actually struggled once in life would never write and article like this.
He just wants his portfolio to go back up, and could care less about people
Bravo Jerk.
-Erik
Jerry & Erik:
Dr. Cornwall does work for a living – he just doesn’t do what you do. He’s on your side and he’s trying to help you by examining the impact of work-fare on the economy.
Your “working-class warrior” attitude just makes you cannon fodder for the class war politicians want you to fight. They’re laughing at you thinking they’re on your side while they pick your pockets clean along with everyone else (including us sissy-boy white collar workers).
Who wrecked the economy and destroyed your jobs in the first place, fellas ? Hint – they work in D.C., not Nashville.
If you want to have a job again, you should thank the next investor you see for wanting their portfolio to “go back up.” That’s what creates jobs, not some bureaucrat in Washington who promises you a ready shovel. How’s that stimulus working out for you, BTW ?
I do have a question for Dr. Cornwall, however – where is this study being published ? I’d like to know the methods they used to reach their conclusions, since it seems the decision to start a business would be a fairly subjective and complex decision based on many factors. How did they “isolate” the impact of unemployment benefits ?