Tuesday, January 15, 2013

15/1/2013: ARRA - some evidence of a US welfare trap

A very interesting paper by Casey Mulligan of UofChicago on the effects of the American Reinvestment and Recovery Act (ARRA) - the act that underpinned early stage stimulus to the US economy and extended unemployment benefits.

In the paper, Mulligan estimates "distributions of marginal labor income tax rates for unemployed household heads and spouses …for three benefit and tax rule scenarios:

  1. Actual rules under the ARRA, 
  2. "Rules as they would have been if they had not been changed since 2007" (in other words 'no ARRA' scenario), and 
  3. "Rules as they might have been with a bigger fiscal stimulus."

Conclusion: "About three million unemployed, with a variety of tax situations, had more disposable income while unemployed than they would have by accepting a job that paid 80-100 percent of their previous one. The number would have been less than one million under 2007 rules, and about eight million under a bigger stimulus."

Thus, per Mulligan, "Tax obligations and foregone unemployment insurance about equally erode the rewards from retaining a job, or starting a new one."

Source: Mulligan, Casey B., The Arra: Some Unpleasant Welfare Arithmetic (December 2012). NBER Working Paper No. w18591. Available at SSRN: http://ssrn.com/abstract=2186320

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