Two anecdotes and a complaint.
Here’s a couple anecdotes I’ve heard about unemployment insurance:
1. A couple years ago a commenter mentioned the following story from someone who ran a hotel in California. A dozen or so maids were laid off during the recession. After a few months the owner tried to hire them back. They declined, saying that with their husband’s income and their unemployment insurance checks they found they didn’t need the second income. But note; if they were collecting UI then they would be required to call themselves “unemployed.”
2. A few days ago an acquaintance mentioned that he heard the following story from a Chicago taxi driver. He said it was hard to keep drivers, because they’d work for a few months and then go collect UI.
How are we to react to stories like these? Are they apocryphal? After all, you can’t collect UI if you quit your job. Except you can, I’ve known people who did so. Are they not politically correct? Do they represent “blaming the victim?” (Something I’ve been doing a lot recently.)
OK, here’s my complaint. I don’t like the way progressive bloggers talk about this issue, for all sorts of reasons (which have nothing to do with ideology–I’m not hostile to their policy views.) There’s a suggestion that anyone who talks about the disincentive effects of UI is somehow either clueless or cold-hearted. Maybe that’s true of some, but there are all sorts of reasons to take this issue very seriously. And suggesting UI has effects on employment is not the same thing as calling unemployed people “lazy.” Consider the following:
1. The statistical evidence on UI is overwhelming significant. When the UI benefits maxed out at 26 weeks, there was a spike in the number re-employed right after the benefits ran out. That’s not to say the benefits are necessarily inefficient, if the spike was due to the income effect then UI might actually make the job market more efficient. But it’s hard to dispute the fact that UI insurance does have some effect on labor supply. And that means some effect on employment, as studies show that the effects on unemployment duration even occur in areas with double digit unemployment.
2. Many Western European countries such as France saw their natural rates of unemployment rise from around 2% in the 1960s to about 10% in the 1980s. We don’t know all the reasons, but the most plausible explanations have to do with various labor market policies. Progressives have NEVER come up with a plausible explanation for this sharp rise in the European natural rate of unemployment. Until they do they have no business calling out conservatives who warn that the same thing could happen here.
3. Denmark recently found that their four year maximum on UI benefits was distorting the labor market, and cut the maximum duration to 2 years. Denmark is arguably the most progressive, most civic-minded country on Earth. Were they just imagining this problem? Were the policymakers over there hypnotized by Casey Mulligan?
4. Both liberals and conservatives seem prejudiced against the proletariat, but in slightly different ways. Some conservatives seem to think the unemployed are lazy, not willing to work hard. This outrages liberals, but I find their defense of the unemployed to be just as offensive. They seem to concede that if UI did increase unemployment, then the accusation of “laziness” would be valid. That’s easy to say if you have a nice, cushy, interesting white collar job that pays well.
I used to do various construction jobs like painting and roofing. It’s work I can do. Suppose I lost my six figure job and was offered a job paying $20,000 a year doing roofing. Would I take it? No, I’m too “lazy.” I’d keep collecting those UI checks and keep looking. Now consider those lucky hotel maids that were offered jobs paying something like $20,000 for the privilege of cleaning toilets and watching naked IMF chiefs parade around. And let’s assume they didn’t need the money because their husband had a job and they were also getting UI checks. And maybe they had kids they wanted to spend time with. How’s their decision any different from mine? Don’t we all follow self-interest? How does all this moralizing advance the positive issue of how many people are unemployed due to the 99 week UI maximum.
I don’t think anyone claims it’s the reason for all unemployment—large numbers of unemployed don’t even collect UI insurance. My guess is that around 1 out of every 100 Americans are current unemployed due to extended UI and higher minimum wage rates. Casey Mulligan seems to think it’s 2 or 3 out of 100. I think that’s too high, that AD is still a big problem. But we ought to be able to have a civil debate without descending into personal attacks. It’s an empirical question, and until we understand it that way we won’t be able to make sensible policy judgments. My hunch is that the Danes have already reached this understanding.
Now for a curve ball. I’m not calling for less UI right now. I’d like to see more monetary stimulus, and then gradually reduce the maximum UI benefits as jobs become more available. So I have “progressive” views on the AD question. But just because AD matters doesn’t mean AS stops mattering, no matter what the new-old Keynesian models tell us, and no matter how squeamish we are about talking about the issue.
In the long run we should reform UI to give workers more “skin in the game” (and idea progressives seem to hate.) If it’s going to worsen inequality, then accompany it with actions that make the payroll tax more progressive.
PS. I plan to visit the university where Krugman/Bernanke/Svensson/Woodford currently teach or once taught. I may not be able to approve or respond to comments for a few days.
Tags: Unemployment Insurance
3. December 2011 at 17:23
Australia had a pattern of each business cycle pushed the general level of unemployment above the previous business cycle. Apart from sustained economic growth (no recession since we adopted explicit monetary policy targeting), we pushed unemployment down by (1) labour market reform (making our highly regulated labour market more flexible and (2) unemployment reform. Including “work for the dole”. Basically, prolonged unemployment benefit receipt was made increasingly awkward and conditional.
I am with you, I fail to see what it so “cold hearted” about saying that incentives matter.
3. December 2011 at 17:27
I see you’re coming for the consultation, Professor. Are you scheduled to do any public speaking on campus?
3. December 2011 at 17:43
Lorenzo, Is Australia the “Lucky country?” Or just smart?
Princeton’14, No speaking, I’ll be attending a conference.
3. December 2011 at 17:44
As a progressive I don’t see too much to disagree with in your account on UI. In the anecdotes the employers always could have offered more money, and at the lower end of the employment market I would think this would be the main distorting effect of UI, slightly increasing reservation wages and a fairly faint marginal effect on employers willingness/ability to hire at that wage. Then again EITC, CHIPS, and Medicaid act as subsidies to low wage employers, so I doubt the net effect of policy does much at all to the wage aside from minimum.
I am a fan of search models because I think they have a better theoretical construct on how people deal with complex decisions like employment or pricing than other economic models. So I think overall UI improves efficiency in the labor market and adverse selection makes government involvement more or less necessary.
I am sure the incentive structure could be improved, but it is time limited and it always pays less than the previews on previous employment. On the other hand our disability program is a mess and has pretty inefficient incentives that encourage people to permanently drop out of the labor market. MIT Labor economist David Autor did a study last year on the effects of trade with China on the US economy, the upshot of which for this discussion is the primary negative effect could be traced to the inefficiency of the long term disability program. Yet no one ever talks about reforming that program, right or left.
3. December 2011 at 17:49
Another blog that I agree with on everything.
One caveat: Some guys have jobs that are grinds, and they will never get a sabbatical. We could say, “Oh, they should go to night school and make themselves better.”
But the fact is, the shape of economy is that there are many “grind” jobs such as drivers, maids, warehousers, security guards etc. We are lucky there are people who take these jobs, which might be the majority of jobs.
I know I am wrong, but when in the USA two weeks is the norm for vacation time, I look the other way on UI. The maids collecting UI? Call it their sabbatical. Also, call it how we buy them in.
Without UI, they might vote for Hugo Chavez.
3. December 2011 at 17:51
Another good one, Scott, except there’s something a little fishy in our “right winger” view on this. You didn’t say this exactly, but I’ve definitely seen others say things like, “If you want to help the unemployed, the real solution to high unemployment is to eliminate UI.”
But that’s crazy, right? Suppose UI were the major explanation for high unemployment rates. Then the high unemployment number is a good thing, from the perspective of the unemployed. Even those who are ineligible for the checks, should be glad that the government is paying a bunch of their potential competitors to not take jobs from them.
So it seems like the standard free-market view on this would go like this: “The way to solve high unemployment is to cut off unemployment insurance checks. That will hurt the unemployed though, who will be forced to go back to work.”
And since the above sounds kind of weird, I suspect this might not really be what’s going on…
3. December 2011 at 17:52
The most disturbing practice around UI is the seasonal layoffs. I know many people who are laid off in the winter and collect UI, only to return to the same job the following spring, saving the business on their labor costs.
3. December 2011 at 17:53
Or rather, I should say, “I suspect that the story is more complicated than a simple labor market supply and demand graph.” For example, maybe if the gov’t cuts off the checks, then some people start going back to work at cr*ppy jobs that they could easily get right now, and then this somehow raises the productivity of workers so that better opportunities become available.
3. December 2011 at 17:57
Ryan Avent on the Autor paper I referenced above.
http://www.economist.com/blogs/freeexchange/2011/02/trade_
3. December 2011 at 18:36
” Progressives have NEVER come up with a plausible explanation for this sharp rise in the European natural rate of unemployment. ”
Paul Krugman did come up with a plausible explanation for Eurosclerosis.
http://www.slate.com/articles/business/the_dismal_science/1997/06/unmitigated_gauls.html
3. December 2011 at 18:55
I thought the same thing when I saw Justin Wolfers and some other progressives on Twitter talking about how the length of unemployment was up. He said something about how we used to think that we were different from Europe on that, and someone replied saying that the longer span of unemployment reduced the argument for a smaller safety net. The idea that unusually long UI benefit term could affect how long people stay out of work apparently wasn’t even considered.
Personally, it seems unfair to the poor to raise UI length. People who used to have better jobs get more money. That’s fair when they paid standard rates for a standard term, but lengthening it post facto is a giveaway to those who used to have good jobs. Better to have standard welfare payments for all past a certain term.
3. December 2011 at 19:06
It’s not about “lazy”, it’s about being “not stupid.”
Some folks I have spoken with gave rather complicated answers, that can be summed up like this:
a. Some amount of “sabbatical”, but not all. (At least that they would admit to me in conversation.)
b. Given savings and net income of about 50% of pre lay-off rates, what rational person takes some really nasty job for less than prior pay? At least before week 99?
Looking for work (or pretending to) while not paying child care because they are mostly home could work out almost net even for a couple of them.
c. Given 99 weeks, the opportunity to start some business, or support a spouse’s career, or investigate a different place to live, becomes important.
d. Given 99 weeks and some savings, retiring at 62, etc. becomes something worth thinking about for some of them.
None of these folks were/are construction workers, maids, or cab drivers. Most of them I didn’t know much at all. (I met them because they were trying to sell things….)
But I think “lazy” or “bad luck” are both much too simple.
I could like to suggest that having unemployment benefits slowly decline over time (say fall by 1% per month after 26 weeks, something like that) might be constructive.
3. December 2011 at 19:37
I once heard NPR segway from an interview with an unemployed person whose last sentence was to the effect of “when my UI runs out, I’ll have to consider a lower paying job than what I’m looking for” to an economist claiming that there is nothing behind the claim that UI could cause people to not take jobs. The justaposition was unremarked upon.
It’s all mood affiliation.
3. December 2011 at 20:02
OGT, Disability is an interesting issue. In the Nordic countries about 12% of 50 to 64 year olds are disabled. In France it’s less than 2%. Not sure what explains the difference.
Ben, Good observation.
Bob, You said;
“You didn’t say this exactly, but I’ve definitely seen others say things like, “If you want to help the unemployed, the real solution to high unemployment is to eliminate UI.””
I didn’t say it because it would be a rather silly thing to say, in my view.
AJ, I’ve heard about that too.
Richard, Yes, but that was written in 1997, so it doesn’t contradict my assertion about progressives. Krugman was a basher of progressives in those days.
John, I think about how Singapore would do it. If they had UI (I don’t think they do) they’d probably require workers to have some skin in the game.
Bryan, Good point. The best solution is to stimulate the economy to create jobs, and then return to 26 weeks.
3. December 2011 at 20:17
Luis, NPR is a constant source of amusement. I recall a sob story about young people with student loans. One guy couldn’t afford a new car because of his student loan payments, and had to purchase a used car! (I can afford a new car, but have never bought anything but used.)
This was viewed as some sort of tragedy.
3. December 2011 at 21:32
Two questions,
First, what about the argument that the number of people looking for jobs is overwhelming greater than the number of people looking for jobs? This is their main argumen.
Second, does the UI benefits affect the unemployment rate or labor force? For example, the minimum wage should affect unemployment but not the labor force, while labor unions should affect the labor force but not the unemployment rate.
3. December 2011 at 21:48
It is pure amateur hour in the big thinkers club to discuss UI without specifically mentioning my plan to AUCTION THE UNEMPLOYED.
You are proving yourselves unable to grasp the key issue to unemployment, it is NOT people not working.
The problem is that someone is not making a PROFIT off their labor.
The profit is the key.
The profit is where the people who matter step in and drive society forward.
It isn’t that the hole doesn’t get dug, the problem is that someone didn’t arbitrage the cost of the hole digging and the sale.
3. December 2011 at 21:56
I posted a link to this at Mulligan’s blog, but he doesn’t seem to read his comments.
3. December 2011 at 22:19
What about the statistics on job seekers per opening? I agree that you see a brief spurt of re-employed after the benefits run out, but that doesn’t change the whole four job seekers per opening situation.
3. December 2011 at 23:15
“In the anecdotes the employers always could have offered more money, and at the lower end of the employment market I would think this would be the main distorting effect of UI, slightly increasing reservation wages and a fairly faint marginal effect on employers willingness/ability to hire at that wage. ”
Just the opposite- I’d say that this is where UI works best to prevent distortion by giving people at least some ability to resist wage suppression. The entire point is that employers should offer more; make it incumbent on them to pay enough to draw people away from unemployment and rising wages will help restore AD while at the same time extended benefit will serve to help shrink our bloated labor force participation until it matches what our current demand levels actually require.
There will absolutely be some short term inflation as decades of wage suppression bubble out of the system until pay catches back up with productivity, but since wages represent significantly less that 100% of prices, the net effect will be more consumer power, thus more AD, and eventually enough growth to begin to allow the labor pool to have room to grow (or require more productivity enhancing technology to be deployed)
Cutting unemployment, on the other hand, will only serve to force more people to take lower paying work, which will, in turn further depress demand and shrink the needed participation rate.
Median wages should be around 90K right now, and we need to unwind the wage decline that has required households to go from having one to two earners to maintain almost the same level of disposable income over the past 40 years.
3. December 2011 at 23:32
It’s not a purely empirical issue. We can deduce that there is a subjective disutility to labor and a value placed on leisure. A worker may consider being able to stay at home worth an extra amount of money. Long story short the government is subsidizing unemployment so it shouldn’t come as a surprise they get more of it. I don’t think anyone would dispute that we grow more corn than we would otherwise due to subsidies.
4. December 2011 at 05:12
Scott consider though what you get is so low that it would not be worth giving up gainful employment.
The cap on weekly benefits rihgt now is $405. There’s no way you can live off that. The maid you speak of are married women. Only if your unemployment is part of some other money you get would that enable you to live off it.
Think of someone who gets say $150 a week-pretty typical, I would gusee that that’s at or even above the median of beneficiaries.
If you offer him a job at Dunkin Donuts, you would have to say that its reasonable for him to turn down the job. Because for one thing few service jobs like that give you full time hours when you just walk in. Someone new will get maybe 15 hours if they like him
So waht is 15 times the minimum wage? About $108 a week before taxes. So even before taxes they make less than they would with UI
On the other hand even if they did get say 30 hours which is a lot more than is typical these days. At abotu $217 a week before taxes, you factor in taxes and then they make slightly more after taxes than they would have by collecting UI.
I do like the idea of making the payroll tax progressive. It seems most conservatives are not interested in that kind of tax cut or change.
What do you think of the idea-that interested some Republicans at one time-about doing what the state of Georgian did and allowing people back to work to continue to collect UI for a time?
I know that’s the opposite of what you’re calling for-you want to cut the number of weeks not expand them-but you did say that you’re not calling for it right now.
What I find unusual about you to the extent that you are conservative is that you even acknowledge the demand side of economics. I assoicate conservatives with solely being interested in the supply side-they are kind of basterdized versons of Say’s “supply creates its own demand”
4. December 2011 at 05:47
Joe, You said;
“First, what about the argument that the number of people looking for jobs is overwhelming greater than the number of people looking for jobs? This is their main argumen.
Second, does the UI benefits affect the unemployment rate or labor force? For example, the minimum wage should affect unemployment but not the labor force, while labor unions should affect the labor force but not the unemployment rate.”
The first argument is a really bad argument, as it misses the fact that UI affects the supply of labor, and hence the wage rate and the number of jobs on offer. Many people confuse “jobs on offer” with “supply of jobs” It’s like confusing quantity supplied and supply. (Note, I assumed there was a typo in your first point, otherwise it made no sense.)
Regarding the second, UI can certainly affect the size of the labor force, but I’m not sure how strong the effect would be. It certainly affects the unemployment rate.
Morgan, I Knew you’d mention it, so I didn’t have to.
Thanks TGGP.
Brett, That’s a common misconception, see my answer to Joe. The number of openings is not fixed.
KRG; You said;
“Median wages should be around 90K right now”
Trying to push wages to that level would push the unemployment rate to Great Depression levels.
John, You’d think everyone would understand that, but many progressives think that’s false, and you are a very bad person for even suggesting such a thing.
Mike Sax, You said;
“Scott consider though what you get is so low that it would not be worth giving up gainful employment.
The cap on weekly benefits rihgt now is $405. There’s no way you can live off that. The maid you speak of are married women. Only if your unemployment is part of some other money you get would that enable you to live off it.”
You’ve got to be kidding. Of course I could live off that. I’ve lived off much lower wages, even talking inflation into account. That’s $20,000 year! And you forgot about savings. I had savings even when I worked poverty level jobs. I’m not sure I understand the point about marriage, as lots of people are married or have boyfriends. So it supports my argument, not yours.
I don’t see the point of your Donut example, it seems to support my point. UI should be paid in a lump sum, if you actually believe it’s “insurance” and not “welfare.” When you have a car accident they don’t give you $X dollar per week until your car is repaired, they give you $Y dollars. But again, I prefer a system where the workers have some skin in the game.
If you keep finding me non-conservative on issue after issue, you might want to consider the possibility that I am NOT A CONSERVATIVE.
4. December 2011 at 05:59
@AJ
If true – and I believe it is – that’s an effective subsidy for seasonal businesses as well as seasonal employees.
@ssumner
“The statistical evidence on UI is overwhelming significant. When the UI benefits maxed out at 26 weeks, there was a spike in the number re-employed right after the benefits ran out. ”
Yes, the evidence is overwhelming, the explanation less consistent. I believe a good chunk of the debate is how much of this signals an incentive problem, and how much signals quasi-efficient search. In explanation one, lazy people exhaust the benefits then go back to work. In explanation 2, diligent people look for efficient matches for their skills (a process that takes time), and only take inefficient matches when they have no choice. Unemployment, in the latter case, is a search subsidy, which makes some theoretical sense in a complex economy which suffers from skills mismatch.
Having said that, I would agree that abuses are rampant…
One thing the labor force participation rate suggests, btw, is that there is even more non-measured GDP out there than there was 3 years ago. I keep wondering whether there are any good measurable proxies for non-measured GDP…
4. December 2011 at 06:13
Seen this Scott?
http://www.theamericanconservative.com/blog/inflation-by-any-other-name/
4. December 2011 at 06:36
Stats do not appear to support the assertion that UI significantly extends un-employment – see the graphic from the Fed Reserve of SF in this post comparing UI eligible and non-UI eligible job seekers.
http://rortybomb.wordpress.com/2011/11/22/eight-things-we-say-about-extending-unemployment-insurance/
4. December 2011 at 09:21
[…] Very thoughtful. 0 Comments Cancel reply […]
4. December 2011 at 09:23
@Vince:
That really depends on what you mean when you say “significantly.” Statistically, the studies cited in that post did show a significant effect.
Perhaps you’re saying that 0.4-0.8 percentage points of unemployment is not “significant.” I think that it is a significant number, but that’s a bit of quibbling over terminology.
What I suspect that you’re really saying is that the benefits of shorter UI are not larger than the human cost.
Note in particular that there’s reason to argue that the positive effects on unemployment could be larger than the comparative study of job-seekers suggest. If the UI eligible people get jobs a little sooner, that creates macroeconomic effects that stimulate the entire economy. Assuming, that is, that you believe that we’re in a situation where stimulus is possible. Rortybomb’s argument for longer duration UI is actually *more* powerful if you assume that we’re not, that it’s all about ZMP and PSST and recalculation.
4. December 2011 at 09:50
Unemployment “insurance” isn’t insurance, it is a welfare problem. If it were provided by private companies, with the worker buying specified coverage, it would be insurance.
4. December 2011 at 09:53
Great anecdote, but you left out the ending. FTFY:
“A dozen or so maids were laid off during the recession. After a few months the owner tried to hire them back.”
And so the hotel owner naturally concluded that they didn’t want to come back to work for him/her because they liked UI, rather than because they didn’t want to work for someone who would capriciously lay them off and then try to hire them back a few months later (and who thus has demonstrated that he/she should not be trusted, if they’re concerned about having to go through the UI application process and waiting period again when they are capriciously laid off again a few months later). After telling the story a few times, he/she even convinced him/herself that they had told him/her that this was the reason why they wouldn’t come back; after all, it couldn’t possible be HIS/HER fault that he/she is having trouble finding people willing to work for him/her, could it?
4. December 2011 at 11:51
@John Thacker
In that case, would the macroeconomic effect of the formerly-UI-eligible getting jobs a little sooner be larger or smaller than the effect of the UI spending itself?
4. December 2011 at 12:19
I wonder if a ‘decaying’ UI payment would make a difference – more at the start (when the unemployed would need more in order to retrain, etc) and less over time, instead of a hard cutoff.
4. December 2011 at 13:58
My brother-in-law is an IT worker who got laid off in 2009. He collected UI for all 99 weeks while not looking for work at all and working on his Masters’. He brags all the time how his UI paid for his Masters tuition. I guess that’s better than doing nothing at all, but not by much.
4. December 2011 at 14:04
This is a basic cognitive bias of all humans. Things perceived as good have only benefits while things perceived as bad have only drawbacks.
I have a couple friends who basically took their UI benefits to the limit as well as a couple friends who took a step down. In my own anecdotal opinion, it seems that these outcomes were efficiently allocated among those who would have their human capital destroyed by taking a step down for 2 years (those who stayed on UI) and those who would have their human capital destroyed by being on UI for 2 years (those who took jobs). I think the net result was positive.
4. December 2011 at 15:06
After much deliberation, the best I can add is in regard to what OGT said about disability, “No one ever talks about reforming that program, right or left.” In spite of my snippy remark the other day, disability is a program sometimes necessary for people from all walks of life. What’s more, it allows the individual to maintain a modicum of integrity in truly lousy circumstances. Plus it is in our self interest, as you said. However, left as it is now, it would eventually bankrupt us all. I say that as someone with a front row seat to the system itself for more than seven years. How so?
Think for a moment what we know of the elderly, whose primary healthcare related expenses occur in the last year of life. Now, think of the percentage of disabled who are chronically ill to a degree that they are hospitalized many times over – in other words incurring expenses which as soon as the patients, hospitals and doctors are able to tend to, the wearying process often starts all over again.
In other words, we could do a far better job of tapping into the incentives of healthcare providers to keep a patient alive, whatever it takes. Many a doctor would probably jump at the possibility of creating a ‘shadow’ system of education ands skills matching at local levels, so that people are not forced from their homes or communities every time it gets too dangerous for the chronically ill to go through a night with just family alone.
Keep the disability that pays the routine monthly bills, that won’t break the bank, and it’s a small price to keep one’s self respect in family and community.
4. December 2011 at 17:46
“And suggesting UI has effects on employment is not the same thing as calling unemployed people ‘lazy.'”
In fact, it might simply be equivalent to calling them “rational”.
4. December 2011 at 18:40
Scott: Is Australia the “Lucky country?” Or just smart? We start with British institutions, which is a historical head start. We have an “interesting” economic history, which provides lessons. We have effective electoral systems — preferential voting single member lower house and proportional representation upper house — which encourages stable governments which have to make their case to get things done. We have compulsory voting — which encourages broad-based policy.
All of this helps, but the biggest single issue was “loneliness”, the tyranny of distance, and adverse trends, long term decline in terms of trade. If we wanted a sustainable welfare state, we had to have an efficient and flexible economy to pay for it and a welfare state that was well-targeted. That sentence basically summarises Australian public policy from 1983 to now.
We tried protection, and it did not work: our standard of living fell further and further behind the US (when it had been ahead of it). We tried debt-financed prosperity, and it led to crises. Nothing was going to save us except us. And the political culture of Australia is deeply utilitarian. (We are the country where Chartism won, sort of.) There was a very pragmatic application of economic theory.
So, some luck possibly but mostly good incentives and reasons to focus.
4. December 2011 at 18:49
Brett: there is virtue in simply “churning” the unemployed. The longer you are unemployed, the more you look like a bad bet to employers and the more you lose contact with basic employment skills.
4. December 2011 at 18:51
Scott — What do you think of Krugman and Eggerston arguing that when short rates are at the ZLB, the AS curve slopes up? Thus ‘bad supply side policies’ are actually expansionary instead of contractionary. Sure doesn’t seem to accord with the history of the 1930s……
4. December 2011 at 18:54
Sorry I meant to say the K & E argument that the AD curve slopes up at the ZLB….
4. December 2011 at 18:59
“OK, here’s my complaint. I don’t like the way progressive bloggers talk about this issue, for all sorts of reasons (which have nothing to do with ideology-I’m not hostile to their policy views.) There’s a suggestion that anyone who talks about the disincentive effects of UI is somehow either clueless or cold-hearted.”
Is this a straw man? Who are you talking about, Krugman, Yglesias, Delong, Thoma or Ezra Klein? Or dumb people that aren’t primarily econ bloggers?
Here’s Krugman in January 2011 on his blog, “”Ha! Krugman used to think that unemployment benefits cause unemployment! He used to be down on Europe!” So, two points: UI can raise the unemployment rate at which inflation begins to rise “” but that’s not our problem now; and over the 17 years since that article was published, a number of European countries have undertaken reforms that substantially improved their job performance.”
Yglesias doesn’t call anyone evil or clueless in this empirical exploration of unemployment incentives http://thinkprogress.org/yglesias/2011/08/12/294883/lump-sum-unemployment-insurance/
I’d guess if you looked for examples that you’d find they all were retorts to people who thought that unemployment insurance was the cause of high unemployment rather than aggregate demand. I can imagine all of those bloggers thinking that the view that unemployment insurance is the primary cause of unemployment in our current situation rather than a short fall in AD is a “clueless or cold-hearted” view. On the other hand, I doubt you can find an example where they say unemployment insurance in general can’t have a disincentive effect and/or that it’s evil to think otherwise.
But maybe you are talking about dumb progressive bloggers I don’t ever read.
4. December 2011 at 21:17
The response I usually hear (and kudos to them because it’s not quite a personal attack) is “do you think someone would actually choose not to work for the little bit they get from UI?”
Nice job on adding some color to demonstrate that sometimes this seemingly irrational decision (especially when you only consider the amount of the UI vs. some assumed to be higher paycheck) may be perfectly rational.
However, I find it frightening that this seems so difficult for so many to think through.
4. December 2011 at 23:57
“The way to solve high unemployment is to cut off unemployment insurance checks. That will hurt the unemployed though, who will be forced to go back to work.”
1) Yes, but an employee and corp doesn’t capture the full benefit of their effort there are spillovers.
2) Your example does hurt the unemployed, but it lowers costs of government which further helps everyone else.
5. December 2011 at 04:17
Scott,
I do not have a subscription to the WSJ, but this article sounds a lot like the future is getting brighter…
http://online.wsj.com/article/SB10001424052970204083204577078601620105164.html?mod=WSJ_hp_LEFTWhatsNewsCollection
5. December 2011 at 05:33
i know a lot of people who got laid of in the US and UK and some got severance packages, some not. My own personal experience is that effort is definitely affected (and: there are lots of people who will stay with a company knowning layoffs are coming in order to get the “package” – paid vacation!). My own personal experience is that it affects 100% of employees’ effort, so 3 or 4 in 100 sounds optimistic.
nevertheless, raising AD is a far better way to fix the problem along with lowering the term as employment rises.
5. December 2011 at 06:15
Lorenzo –
WITHOUT QUESTION, New Zealand is the lucky country… They have everything you do, but more rainfall per square kilometer, no poisonous spiders or snakes, and even less corrupt government.
http://blogs.wsj.com/corruption-currents/2011/11/30/new-zealand-seen-as-most-transparent-country-in-2011-index/?mod=google_news_blog
Oz is close, though. I’ve loved NZ ever since they deregulated and auctioned spectrum in the 1990s.
5. December 2011 at 06:15
BTW, this is what good government looks like:
http://www.rsm.govt.nz/cms/licensees/spectrum-auctions/spectrum-auction-design-in-new-zealand/spectrum-auction-design-in-new-zealand-report
However, I freely admit it’s rare.
5. December 2011 at 07:43
As the kind of progressive you don’t much like, I’d be willing to support a UI program with benefit limits keyed to labor market indicators. So there might be a 26 week maximum during times of full employment, but a full year in harder times, and two years in times like the present. And if we are going to insist on running our monetary and fiscal policy in such a way as to create a long lasting depression, then perhaps even longer.
The problem is that, while there certainly are people who will reduce their supply of labor due to UI, this does not have a major effect on employers ability to hire when there is not close to full employment, because there will be other workers available.
I’ve seen a number of studies which suggest that in statistical aggregate the effect you describe here is not that large, and mostly about people refusing to take jobs that are a big hit to their career resume. If I have UI, I don’t take jobs at McDonalds or Stop n’ Shop just to get a paycheck — I keep looking for employment that furthers my career or starts up a new one. OTOH, without UI, I may not have any choice unless I want to start borrowing from relatives or going on welfare.
One test that disaggregated this affect was to look at people who received lump sum UI payments on separation versus those who received weekly/monthly payments that ended when they got a new job. And in this test, those with lump sum payments did not get new jobs appreciably faster on average.
So this argues that what happens is that UI allows people to wait for a real job, rather than desperately taking whatever job will pay them. The effect of reemployment when people go off benefits is mostly from people who now have no choice but to take a job to survive which severely underemploys them. Jobs that they would not take if they could survive otherwise, even if it had no effect on their total unemployment compensation.
It is not clear to me at *all* that forcing a bunch of people to accept dead-end underemployment has a helpful effect on labor supply overall, although it is surely helpful for employers who hire at or near minimum wage.
5. December 2011 at 07:57
Let me share an example. I am an attorney, and found myself laid off in 2009. I went to a very good law school, worked hard, etc…my firm just had serious problems, and needed to lay off a lot of people. Finding a job was extremely challenging. I has offers to take salaries at about 1/3 of my former salary, and they were in barely legal positions. By this I mean, they were essentially paralegal in nature.
Unemployment insurance allowed me to hold out for a better match. I still had to downgrade–my current position pays 70% of what my former position did, though with much more reasonable hours, so it may have been a blessing in disguise. Still, had I been forced to accept one of the very low paying, low prestige jobs, it would have done immense damage to my resume and my future. Are we really better off if someone like me has to take a barista job rather than hold out?
5. December 2011 at 08:10
Reading John Thacker, I agree. I am all in favor of longer UI in general, but if it is ad hoc in response to a recession (as opposed to keyed in advance to the unemployment rate or similar labor market indicator, so that the premiums can probabilistically account for extensions), then extensions of regular unemployment insurance become a pure transfer, and there is no consequentialist justification for giving larger transfers to the better off. If you’re going to have ad hoc extensions (that weren’t paid for by unemployment insurance premiums) they should just pay some minimum benefit to everybody who had full time work.
5. December 2011 at 08:59
Guaranteed Income can go one forever.
Auction the unemployed, make every poor sod get up and go to work for a boss in a for-profit system, and in return every single person can receive added GI that more than covers their nut.
The simple facts is many people cannot earn enough to cover their own nut… so FORMALIZE this.
Cost of labor (what the boss pays) has to be globally competitive, it has nothing to do with what the labor can live on.
That we want to make sure everyone has enough to live etc. is a SOCIAL political decision that has nothing to do with economics.
5. December 2011 at 09:40
Both liberals and conservatives seem prejudiced against the proletariat, but in slightly different ways. Some conservatives seem to think the unemployed are lazy, not willing to work hard.
Many are working hard while on UI doing some job search, some baby sitting, some production of in family use and some work for cash.
I’m not calling for less UI right now. I’d like to see more monetary stimulus, and then gradually reduce the maximum UI benefits as jobs become more available.
Another argument for UI is that it is much cheaper per worker that in fiscal stimulus.
5. December 2011 at 09:42
Addendum a wage subsidy might be much better than UI, why not give it a try.
5. December 2011 at 10:59
The above story I told is not quite complete, for it begs the question Morgan would also face in his quest for greater employment: how would that even be legal? While I’m not sure which institutions would stand in Morgan’s way, I know what would stand in the way of doctors teaching people how to take care of one another healthwise: the AMA. First, I would say to the AMA that I know the negative externalities were not intentional, but now the long term budget of our country is at stake. Plus, doctors watch helplessly as their country falls apart around them and are no longer even allowed to be part of the debate for solutions. When they gave the AMA the right to protect them, they effectively lost their right to vote. Consider what William Easterly in The White Man’s Burden has to say about that:
“When rich country politicians gaze at the non-voters in the rest of the world (undeveloped countries), they become planners. This is another clue to the likelihood of planning: outsiders are more likely to be Planners, while insiders are forced by their fellows insiders to be searchers.” Just like the undeveloped country, the doctor and his patient, who have the real actual relationship with one another, are no longer allowed to do anything about it.
5. December 2011 at 11:43
The point about marriage is that a married woman can count on her husband’s income-she is not living off unemployment at best it is a subsidy.
$405 is not typical it is the most you can get no matter what your income is above a certain level. I don’t think $1620 goes as far as you think in this day and age can’t speak to the timem you remember.
Today you’ll be very lucky to find rent under $1000 a month. Then there’s the cost of everything going up from food to gas. Then there’s if you have to pay for heat. But $405 is the outlier though you focused on that. You tell me you could live off of $150 or $200. Wholly on these wages alone.
Many today don’t haev savings. If at some point you were poor and lived off of low wages your savings must have been from before you were poor, perhaps you had a trust fund or you had a better job in the past you saved money from.
Today $405 would be difficult to live off of if you had no savings. But again that’s not typical of what the average recipient receives.
As far as the welfare label I never said I was opposed to welfare anyway. But UI is not welfare as you have to pay into the system
5. December 2011 at 13:21
The difference between the way Scott presents this and the way Casey Mulligan presents is the offering up of solutions. Mulligan presents no solution except the implied – get rid of unemployment insurance. This hurts the “lazy” as well as “legitimate”.
If Mulligan were to offer market based solutions instead of the implied “cruel” solution, he might be better received. Personally, I like forced savings into emergency accounts accompanied by an expansion of the EITC.
5. December 2011 at 14:35
“Trying to push wages to that level would push the unemployment rate to Great Depression levels.”
Only if the participation rate doesn’t drop in response because of many fewer households requiring two incomes to maintain economic security.
5. December 2011 at 18:43
How does this argument against extending UI deadlines (not adding additional weeks) square with the supposed cause of the unemployment in the first place, tight money? It seems like you’re trying to have it both ways, the Fed is driving persistent unemployment and the unemployed are at fault. I don’t have a problem cutting people off if there’s some way for them to get income, but perhaps some thought needs to be put toward what kind of recessions those studies of the effects of UI covered. I might agree if the studies covered the last time we had a huge plunge in NGDP and the Fed had decided upon stubbornly targeting inflation at 2% in the middle of it without making up for the loss of NGDP.
I would much prefer meeting the Fed in the middle rather than just cutting all these people off if there isn’t going to be anything for them to go to. I’ve heard way too many horror stories from the great depression of people starving to death; regardless of consequences, it is just not worth that. If people are worried about budgets, cut everything else first, then attack UI.
5. December 2011 at 21:42
We shouldn’t confuse unemployment insurance as a concept with the current US system, which is filled with perverse incentives.
Why not make it more like real insurance, with payments based on contribution. It could be bootstrapped off the social security contribution. Increase that tax and kill the existing one on a neutral basis and then phase in making it self supporting. We have actuaries to calculate such things.
There could still be emergency extensions, but they’d have to be amortized by adjusting the tax rate – kind of an FDIC model.
Once you exhausted your contribution based payments, you’d get some number of weeks at the minimum, which would be taken from future contributions, if any, according to the payment formula.
BTW, a big part of the unemployment problem is the enormous aggravation and overhead of having employees. Just fixing the Moynihan changes to the contractor definition would give the economy a boost.
6. December 2011 at 05:44
The distortions are even more serious when you mix in a union.
In 2009 a GM plant in Syracuse, NY closed after the UAW rank and file rejected a new contract that included large wage concessions. Rank and file acted rationally to shut the plant down rather than accept a pay cut. In effect their choice was:
1) If they voted no, which would shut the plant down, they would collect generous unemployment based on their old far too generous contract.
2) If they voted yes and the plant remained open, their pay would have been slightly higher than their unemployment benefits, but they would have to work.
3) If they voted yes and the plant closed anyway, they would accept much less unemployment based on their newer loser wage.
Without unemployment insurance, rejecting this contract would have been madness. With unemployment insurance, it is rational.
(For documentation see http://www.bizjournals.com/buffalo/stories/2009/03/16/daily28.html
6. December 2011 at 06:58
Any thoughts?
http://www.mmexecutive.com/news/Council_of_Economic_Advisers_recovery-225612-1.html
6. December 2011 at 10:06
The other side of this is that people chronically receiving unemployment benefits should pay more for the insurance. Treat them like horrible drivers.
6. December 2011 at 20:51
Perhaps we in the Market Monetarism movement should lay out a course of action…
Such as (in the USA), the Fed buying $100 billion a month in bonds or assets not to a dollar amount target (such as $600 billion), but to a publicly stated NGDP target, and wiping out IOR…and for the ECB a similar action.
Perhaps if we lay out some concrete steps and targets….
talking points, and get the argument into our court again…we may be losing traction here….
7. December 2011 at 05:56
I think Progressives have the same answer for the sharp rise in unemployment as everyone else does: when you subsidize something you get more of it. I just don’t see why that’s such a bad thing. Is there this important stack of work left undone or widgets left unmade that this 8% of the population should, in your opinion, be doing? And if so, are you willing to pay for that work or buy those widgets? Since you (“you” in the aggregate sense of economic demand) are not, and these people still have to eat, I don’t see why a high rate of subsidized unemployment needs to be a bad thing.
As an economy, we don’t want to pay these people to make things or provide services. We don’t have a bunch of other stuff and other services we need. Why should they work, particularly if they don’t want to?
7. December 2011 at 05:58
The abovementioned link from dcpi is definitely worth reading. Thirty years ago, Buckminster Fuller wrote Critical Path and in it he said, humanity could well have a good chance at survival if it would only tell the truth. There are many who are now asking Bernanke to do just that. We can all bring back employment if we are willing to tell the truth to one another. For the right, the truth lies in asking every person what kind of marketplace they actually need to survive in and seeing how it is possible to achieve that. For the left, the truth lies in creating knowledge integration at local levels so that all can participate in economic and social life, and have their worth validated as a human being.
7. December 2011 at 17:21
“I just don’t see why that’s such a bad thing. Is there this important stack of work left undone or widgets left unmade that this 8% of the population should, in your opinion, be doing?”
All the yards in the ghettos, and the public parks, roads, and sidewalks can be clean and maintained.
All the middle class houses can be cleaned, freeing mommies to do more productive things.
All the telemarketers can be American working from home.
—–
And that’s the LOW LOW END, the up market benefits of $3 per hour labor throws COUNTLESS ancillary benefits to the lower middle class neighborhoods where multiple middle class services become accessible.
Auction the Unemployed. Provide a Guaranteed Income. Get out of the way.
The boom will be massive. Whole zipcodes will be remade in a year’s time.
7. December 2011 at 19:20
Perhaps we in the Market Monetarism movement should lay out a course of action…
Perhaps if we lay out some concrete steps and targets….
Setting the policy itself is half the battle. the Fed own recent notes suggest that QE 1 and QE2 impacted rates at least half through the expectations channel (not through supply). The main impact of any actual buying is to prove the determination and credibility of the new policy (any actual buying at the margin would be a very small fraction of the total market). Pick a number … what number convinces the market that the FOMC is serious. Thats the right number.
7. December 2011 at 21:15
Statsguy: we auction spectrum too!
I would point out that NZ is poorer, and has wilder shits in policy. Just saying 🙂
8. December 2011 at 11:26
“And that’s the LOW LOW END, the up market benefits of $3 per hour labor throws COUNTLESS ancillary benefits to the lower middle class neighborhoods where multiple middle class services become accessible.”
Nope. that’s clearly not true. If people were willing to pay for that work to be done, *they would be paying for that work to be done*. Since we don’t have any more work we’re willing to pay for, subsidized unemployment is the only option.
9. December 2011 at 19:54
Statsguy, Yes, I mentioned that we don’t know exactly why UI extends unemployment.
Joe2, I just glanced at it–looks like he doesn’t understand NGDP targeting.
Vince, That piece suggests that UI might have raised the unemployment rate by about 0.6%, or a million people. I’d say that’s significant, and it’s not far from my 1% estimate. Of course no one knows, especially because UI gets entangled with monetary policy, and affects NGDP growth.
Nikolas, Yes, it’s not really conventional insurance. Whether it’s “welfare” is a matter of opinion, or definition.
Miko, That’s possible.
jb, It might help a bit.
Liberal Roman, Interesting, and kudos for sharing that anecdote, as I know you are politically liberal. We need more open-minded people like you on both sides of the spectrum.
Jason, Very good observation.
Becky, It certainly has it’s good side. I don’t have an answer the the cost problem, which seems to be getting worse. I find the difference between the European programs to be startling, since both France and the Nordics are viewed as “welfare states.” I wonder what’s going on there?
David Stinson, That’s right.
Lorenzo, Thanks for that info on Australia. It makes sense.
Tommy, Yes, the 1930s pretty definitively disproved that theory.
Charlie, A recent Thoma post implied Mulligan was calling the unemployed “lazy.” Karl Smith suggested the view that unemployment was voluntary was obviously wrong. After all, the unemployed are unhappy. These seem to fit the “cold-hearted or clueless.”
I didn’t mean to say progressives argued it never had any disincentive effects. I was objecting to the tone of many arguments. (And there are many others, but I don’t have them all at my fingertips.)
Seth, I agree.
Marcelo, I hope so, but am skeptical.
dwb, I agree.
Michael Sullivan, You said;
“The problem is that, while there certainly are people who will reduce their supply of labor due to UI, this does not have a major effect on employers ability to hire when there is not close to full employment, because there will be other workers available.”
This is wrong, you simply cannot reason through a macro problem with micro reasoning. UI causes there to be less job openings in the first place. That doesn’t make it a bad program, but it does have effects, and micro reasoning doesn’t get at those effects on nominal wages and unemployment.
As a result I don’t accept your other arguments about “dead end jobs” as they are based on a misunderstanding of the effects of UI.
Michael Jimson, You said;
“Unemployment insurance allowed me to hold out for a better match.”
That’s exactly my point, and I’d never criticize you for doing that.
Floccina, I agree.
Mike Sax, You said:
“Today you’ll be very lucky to find rent under $1000 a month.”
My first teaching job I made $1500 a semester. I rented a room in someone’s house. If I’m single I can easily find a place to live for way below $1000/month. With a family it’s tougher (in expensive cities.)
You said:
“But UI is not welfare as you have to pay into the system”
The same is true for welfare. You pay income taxes into the system. If your husband divorces you and you lose your job then you go on welfare, and collect back some of the money you paid in when you were working. All these ideas of “I paid for the benefit” are simply in people’s minds, and don’t correspond with reality.
Sam, I completely agree.
KRG, I completely disagree. Workers aren’t that productive.
Bonnie, You said;
“It seems like you’re trying to have it both ways, the Fed is driving persistent unemployment and the unemployed are at fault.”
Not me, I think it’s the Fed’s fault, not the unemployed’s fault.
Peter, That might work.
Mr Bankerman, Good example.
Weldon, You said;
“I just don’t see why that’s such a bad thing. Is there this important stack of work left undone or widgets left unmade that this 8% of the population should, in your opinion, be doing?”
Yes. They should build me a mansion in Beverly Hills, and then do gardening and cooking for me. Or build modest houses for the poor, so they have a better place to live.
Seriously, you don’t think there is anyone in America who would prefer a higher standard of living? That’s kind of bizarre, isn’t it?
9. December 2011 at 19:55
dcpi, I mostly agree on the monetary policy, not the fiscal policy.
14. December 2011 at 14:37
[…] an extension of unemployment benefits amidst our non-recovery from the recession. Economist Scott Sumner pleads with progressive bloggers to remember that whether UI benefits have disincentive effects […]
16. December 2011 at 10:25
[…] from Scott Sumner. […]
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[…] http://www.themoneyillusion.com/?p=12198#comments […]
24. April 2017 at 05:27
[…] This was Sumner last November. http://www.themoneyillusion.com/?p=12198 […]