Unemployment benefits are back in the news: Senator Jim Bunning held up a $10 billion bill in the Senate because he felt it didn’t hold to the pay-as-you-go laws passed earlier this year (the law apparently doesn’t apply because of a technicality; the subjects of the bill were said to be ‘emergency provisions’). Unluckily for the senator, the provisions of the bill happened to concern the extension of unemployment benefits and the implementation of the so-called ‘Doctor Fix’ (preventing the pay cuts to doctors from Medicare). Even stranger to many politicians was the defense from Minority Whip Jon Kyl from Arizona stating that “… if anything, continuing to pay people unemployment compensation is a disincentive for them to seek new work.” Unemployment benefits preventing the unemployed from seeking work? Blasphemy!
As a result of Bunning’s tactics, he and Kyl quickly were spun as obstructionist senators preventing the safety net of the unemployed from being deployed. Writers like Nobel Prize winning economist Paul Krugman quickly rushed in to rebut Kyl’s ideas. However, Krugman’s arguments seem to contradict statements he writes in the economics textbook that he writes with his wife. Yes, introductory economics does state that unemployment benefits do create disincentives to work in those that receive the benefits.
Obviously we are in a recession, and not everyone who wants a job is able to get one (and unemployment benefits are an important benefit for many people). However, it is naive to believe that the benefits provided are being used without any gaming of the system. If you have any doubts, see the oft-cited study produced by Dale Mortensen in 1977. As you probably expect from the tone of this article, the study found the upcoming cessation of benefits increases the number of jobs found, among other things.
Eurosclerosis and Funemployment
Eurosclerosis is a term coined to explain the phenomenon in Europe in the 1970s and 1980s where rising levels of economic output were paired with large numbers of the ‘long-term’ unemployed. Even with huge gains in productivity and economic output in Europe, unemployment and especially long term unemployment remained stubbornly high. Job mobility was another sticking point. In fact, it was only when unemployment benefits were (paradoxically?) cut in the 1990s and the firing of employees was made easier that Europe left its funk.
Witness the United States today. True, the recession hit hard and unexpectedly. However, we potentially now find ourselves in a ‘jobless recovery’, in which productivity is rising and wage growth is increasing, but unemployment is remaining stubbornly high around 9.7%. The number of workers unemployed for 26 weeks or more is hovering around 6 million people.
In June, the Los Angeles Times ran an interesting article about the concept of “Funemployment”. In the midst of the biggest recession in a long time, instead of looking for new work, many laid off workers were instead increasing the amount of their leisure time. Even if unemployed people aren’t completely freeloading off unemployment benefits, the promise of paycheck which comes in lieu of working and stops immediately upon finding a job is certainly a disincentive to begin working again any way you slice it.
Congress’s response has been, predictably, appealing to emotions and claiming (incredibly) that increasing unemployment benefits increases employment. Get that: increasing the amount of time people can be unemployed and provided with benefits decreases the amount of people receiving those benefits. Therein lies the contradiction. Nonetheless, Congress opted to increase the allowable length of time through the Emergency Unemployment Compensation Program in 2008.
As with many political issues, the problem with unemployment is not the issue that it undertakes. An unemployment net for people who lose their jobs is a laudable benefit, and one that many people consider a lifesaver. The issue is with how the program is designed. Much like the Health Savings Account program, there are other plans which cover unemployment benefits. In 2002, Chile offered a hybrid model of unemployment benefits, which covers around 80% of the workforce. Under this model no ‘Solidarity Benefits’, which originate from the program, are paid out until an unemployment savings account is drained. The unemployment savings account is a mandatory account which workers pay into to be tapped in the case of unemployment. The idea is to give workers some incentive to avoid the draw-down of the account, and to put some skin in the game. As you might expect, reducing the disincentive to seek employment actually does decrease the length of unemployment and increases the job finding rate. Imagine that.
Anyway, unemployment benefits aren’t as cut and dry as they appear on the surface. Let me hear what you think!