Unemployment Rate

To Help People Keep Their Jobs During Recessions, It's the Uncertainty, Stupid

Good government measures can reduce unemployment during a recession.

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A lingering question from the so-called Great Recession is why, when things went south, some places were so much harder hit than others. Nevada, for example, saw its unemployment rate jump up by more than 7 and a half percentage points. Some other states meanwhile had increases of less than 2 percentage points.

One explanation, according to a new study from Daniel Shoag of Harvard's Kennedy School and Stan Veuger of the American Enterprise Institute (AEI), is that states with low levels of "policy uncertainty" fare better. It turns out that a lot of confusion about things like whether tax rates are about to change dramatically and whether government coffers can weather a downturn without plunging the state into red ink can have brutal effects on a local economy. Intuitively, this makes sense: If it's unclear how revenues will be appropriated in a coming year, or what new regulatory changes may be on the way, businesses may be reluctant to invest and hire.

In practice, this means there are steps that state governments can take to insulate their workforces against future shocks. The paper identifies a number of variables that were correlated with higher policy uncertainty and—perhaps as a result—greater unemployment spikes during the recession.

"Some of them are hard," explains AEI's Veuger, "because it would include things like, you never want to have a lame-duck governor when a recession hits. That's impossible [to control]. But having a budget deadline is good. Finishing your budget on time is good. There are a lot of straightforward good government measures that do seem to dampen the effects."

Some examples from the paper of things that were associated with higher levels of both uncertainty and unemployment included:

  • a full-time state legislature
  • a legislature that's divided between the two parties
  • a history of late budgets
  • a lame-duck governor
  • a high fraction of state revenue that comes from taxes
  • a high salary paid to the governor

Things that were negatively correlated with both uncertainty and unemployment included:

  • a large state rainy day fund
  • a strong balanced budget law
  • a structural surplus
  • a budget deadline
  • a provision for how the state will deal with a government shutdown

The lesson: If you lost your job in the last recession, part of the reason might be your state legislature's inability to get its act together and do things like turn in budgets on time. And if you're worried about losing your job in the next economic downturn, now might be a good time to start agitating for statewide reforms like balanced budget requirements and cushier emergency funds.

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