Extending benefits helps individuals but increases joblessness

Reuters

Job seekers wait to meet with employers at a career fair in New York City, October 24, 2012.

Article Highlights

  • @TPCarney: The Senate probably made the right move in voting to extend long-term unemployment benefits.

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  • UI insurance doesn’t provide a comfy living.

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  • Paying people not to work still creates costs – even if the costs are outweighed by benefits.

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The Senate probably made the right move in voting Tuesday to extend emergency government benefits for the long-term unemployed.

What the “World’s Greatest Deliberative Body” never did, though, was engage in a meaningful debate on the pros and cons or the proper role of the federal Unemployment Insurance (UI) program.

All safety net programs can create bad incentives. Welfare, while helping fulfill our duty to feed the hungry, has created disincentives for marriage and work. It can also foster dependency.

The government tries to strike a balance between the good of helping people who are between jobs and the danger of them becoming dependent on this assistance and dropping out of the labor force. The ground rules of the federal UI program represent the standard compromise: If you lose your job, you can get a check for about half of your previous income, for about six months, as long as you are seeking a new job.

Some liberals become indignant and make meaningful debate impossible whenever a conservative points out the tradeoff: that unemployment insurance can reduce overall employment. For instance, in 2010 then-Sen. Judd Gregg, R-N.H., said extending emergency benefits “encourages people — rather than go out and look for work — to stay on unemployment.” Atlanta Journal-Constitution columnist Cynthia Tucker mischaracterized Gregg’s argument this way: “Giving people who lose their jobs unemployment benefits makes them lazy and unlikely to look for work…”

But that’s not the conservatives’ argument. The argument is that when you pay people for being unemployed, you decrease the incentive for them to find work. This will cause some people — acting out of rationality and not laziness — to turn down some job offers and to not search as hard as they might otherwise. Studies suggest this effect is modest, but real.

UI insurance doesn’t provide a comfy living. In Maryland, if you were earning $600 a week ($15 an hour, or about $30,000 a year), your unemployment insurance would be $300 a week.

Who wouldn’t want to go back to work for that extra $300 a week? Sounds like a no-brainer, but it’s not that simple. Riding Metrorail and the bus from Silver Spring to downtown and back costs $10 a day, reducing to $250 your weekly wage.

Maybe working brings dry cleaning costs. Because you won’t have as much time to make your own lunch, you’ll buy $8 sandwiches on K Street a couple of times a week. When you were unemployed, you weren’t just sitting on your couch: You were mowing your lawn, walking your dog, handling minor plumbing issues, and so on. Working 40 hours, you may have to pay people to do these things.

Throw in taxes, and it’s easy to see how that $250 a week gain for working could be cut in half by these and other costs. Would you go back to work 40 hours a week to increase your income by $125 a week? That’s about $4.10 an hour – assuming your new job pays as much as your old job.

If your new job pays less than the old one, going back to work might net you near zero. If going from UI to work also means paying for daycare, forget about it.

The person who stays at home and keeps receiving unemployment benefits isn’t lazy any more than the person who takes a lower-paying job for a shorter commute and more rewarding work – he’s rational.

These incentives aren't always bad. Out of concern for our laid-off neighbors and concern for the broader economy, we don’t want unemployed people desperately taking the first job to open up. But paying people not to work still creates costs – even if the costs are outweighed by benefits.

But here’s another hidden cost to this dynamic: With more people receiving unemployment benefits, and given the costs associated with working, employers have to pay more to attract the unemployed. Again, this is good for those workers — but it is bad for their unemployed neighbors.

States that extend unemployment benefits have higher wages (because it costs more to lure people away from the UI benefits) but fewer jobs available and more people unemployed, according to a recent study by researchers from the University of Pennsylvania, the New York Fed and the University of Oslo in Norway.

In other words, a company that could have created three jobs at $30,000 can’t get workers for $30,000, so it creates two jobs for $45,000 – and the third guy is out of luck. This effect is so large that it drove “most of the persistently high unemployment after the Great Recession,” according to the study.

Liberals dismiss the disincentive effects today, arguing there just aren’t jobs out there. Maybe the jobs aren’t there because lengthy unemployment insurance is killing these jobs.

This is a complex debate. It would be nice if we could have it.

Timothy P. Carney, The Washington Examiner's senior political columnist, can be contacted at tcarney@washingtonexaminer.com. His column appears Sunday and Wednesday on washingtonexaminer.com.

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About the Author

 

Timothy P.
Carney
  • Timothy P. Carney helps direct AEI’s Culture of Competition Project, which examines barriers to competition in all areas of American life, from the economy to the world of ideas. Carney has over a decade of experience as a journalist covering the intersection of politics and economics. His work at AEI focuses on how to reinvigorate a competitive culture in America in which all can reap the benefits of a fair economy.


     


    Follow Timothy Carney on Twitter.

  • Email: timothy.carney@aei.org

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