Social benefits in the United States are notoriously stingy.
When someone gets laid off, for example, unemployment benefits only last for 26 weeks and represent just a percentage of the person's previous pay. While benefits vary by state, the maximum benefit in New York is $420 per week — barely enough for most city dwellers to pay rent. To make up for a loss in income, people often turn to their credit cards or even take out a second mortgage to pay their bills.
As a result, the amount of private credit that unemployed Americans have access to determines how long they can afford to look for their next job, says a new a working paper published by the National Bureau of Economic Research.
If you have access to it, credit acts like unemployment insurance, giving people who aren't earning a regular paycheck more of a cushion to pay their bills while they search for a job, Kyle Herkenhoff, one of the three authors of the NBER paper, told The Huffington Post. And being able to afford a longer period of unemployment is a positive thing, because you have time to find a good job instead of taking the first offer you get.
On its face, this is sort of an intuitive conclusion. "If you lose your job and you are severely indebted, what else are you going to do other than take the first job?" Herkenhoff asked. But it's the first time that actual data has been brought together to prove that this is true.
The findings have implications not only for the poor, who have less access to credit in the first place, but also for people who can get access to credit but use it up. If your credit cards are already maxed out when you lose a job, it's harder to spend time searching for work that's a better fit. Desperation can cause people to take jobs that pay less or don't exactly line up with their skills.
The lesson here for individuals is pretty simple and not particularly astounding: Having access to credit can be useful in a financial emergency, so it's helpful not to max out your credit cards in good times.
But there's also a message for policymakers who determine how much access to credit the entire economy should have, says Herkenhoff.
"The idea is that if you can change interest rates, it affects the types of jobs that households take," he said. The NBER's working paper suggests that flooding the economy with credit during a downturn can have a long-term positive effect on the kinds of jobs temporarily unemployed people end up with. And that benefits everyone once the economy gets going again.
The findings also expand on what we already know about the effect of changing interest rates on the economy. "The existing research shows that if you drop a lot of credit on an economy, people will spend more," said Herkenhoff. "This goes the other way: You might see unemployment rates go higher as people take longer to find jobs."
But that's ultimately a good thing when they find jobs they're better suited for.