Why It's Time to Rethink Unemployment Benefits

Wednesday, July 07, 2010 - 08:50 AM

Two gentlemen asked Ebenezer Scrooge for his "liberality" to help the destitute.  Scrooge immediately asked if something had perhaps happened to the prisons, the union workhouses, and the treadmill, all means of punishing the poor.  When assured that these institutions were in fact all active and busy, Scrooge rubbed his hands together and chortled, "I'm very glad to hear it!"  An economist answering questions about unemployment benefits always feels a bit like Scrooge.  Because the answer to the question "Couldn't we do more to help the poor?" is always, "Yes, but..."

So, should we rethink unemployment compensation?  Yes.  But...

More "liberal" unemployment and welfare benefits (the two are blurring, at least in the public mind) create more unemployment.  People respond to incentives, that's all there is to it.  So: a.  If welfare and unemployment payments are higher, the incentive to find work in the sort of low-paying entry jobs people start out in are lower. b.  If welfare and unemployment payments are "extended," as is now being proposed, then people will delay their job search.
 
No, not everyone.  It is easy to find examples of people who don't act this way.  But most people do act this way, most of the time.  All of the impassioned anecdotes in the world don't change the facts, supported by studies.  You can find some of the best studies summarized (I should say, "Summerized") in an article by Obama Administration economics adviser Larry Summers.  You may not like this fact, just like you may not like gravity.  But gravity pulls us toward the earth, and unemployment benefits that are large and long pull us toward unemployment.
 
There's another problem.  Unemployment insurance, as it stands now, is funded by a tax on employment.  The more people a business employs, the more the business has to pay in unemployment insurance.  What could go wrong with THAT brilliant plan?  If we increase benefits, and extend benefits, we are placing a large tax on hiring.  France and Germany have found that this problem is severe, and France in particular last year tried to make it easier to hire and fire without paying a large tax.  The effort was blocked for political reasons, but the unintended consequence was that employers are very reluctant to hire new workers.
 
Still, I said "Yes, but" not "No!" above.  There is an argument that I have not heard much in the public debate, and I think that we should consider it.  The "social contract" in the European Union, at least in most countries, is that the poor and unemployed can expect a safety net of social programs, including some money to live on, housing, and health care.  The "social contract" in the U.S. is different.  We tend to focus on free trade and open markets, with the consequence that consumers can buy products from all over the world at extremely low prices.  Most people, because they are employed, benefit from this bargain.  Computers, radios, televisions, socks, shoes...  All of these have seen dramatic price declines, controlling for quality and inflation, in the last 30 years.  Two cheers for globalization!
 
But only two cheers, not three.  The benefits of globalization go to most of us.  But the costs of globalization are not widely shared.  Instead, the loss of jobs has been concentrated in a few sectors, such as steel, heavy manufacturing, textiles, apparel, and consumer electronics.  If our "social contract" is based on capturing the benefits of globalization, don't we, the many winners, owe those who lost their jobs through no fault of their own some consideration?
 
Economists justify globalization this way:  The "make or buy" decision should be based solely on cost.  If we can buy something more cheaply than we can make it, then free trade makes MOST people better off.  And the gains to the gainers exceed the losses to the losers.  But the unemployed victims of globalization are not "losers," they are just people who worked in industries that were once strong, and are now weak, due to the rapid transformation of the global economy.
 
There is no good argument to subsidize the industry, mind you.  If we can buy textiles more cheaply from other countries, there is no reason to tax our consumers just to "create" artificial jobs in a dying industry.  But why is it okay to tax our unemployed workers just so our consumers can have cheap products? 
 
We may need to rethink unemployment compensation.  26 weeks of benefits is enough to help a worker who has been laid off from a cyclical industry, because that worker may be rehired and that worker's skills are still valuable in the marketplace.  But if that industry has disappeared from the U.S., the worker needs a longer period of support and opportunities for retraining to become a productive part of the new economy.
 
Even Scrooge might agree with that.

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Comments [3]

Tom from Connecticut

I was out of work during the last jobless recovery (9 months in 2002-2003). My unemployment benefits were extended 13 weeks and I was grateful. I was looking hard for a job - had many interviews - but no offers. I wrote to my congresswoman, a Republican, urging to extend unemployment benefits for 13 more weeks. She wrote back in a letter that she was sympathetic to see me find a job but would prefer to let the free market correct itself instead of extending unemployment benefits. The bill was passed anyway - and at the end of my 13 week extension I found a job. I had to relocate to another part of the state, but I was happy to be working in my field of Information Technology again. I was prepared to use the rest of my savings to stay afloat, but that extension really helped when I needed it. People say suck it up and find a job - well that's what I had been trying to do for those 9 months, and I resent those comments that imply people are lazy and depend on unemployment compensation as welfare. Have you been ever been out of work for a extended period of time? I know unemployment insurance shouldn't last forever, but temporary assistance really helps. I've also learned to keep a year's worth of savings to live on and stay ahead nine months in my mortgage payments. Americans need to save more in case unemployment benefits are not extended.

Jul. 20 2010 09:51 AM
Joyce from OK

In 2009 I was let go because my employer and I had different philosophies. (that is the reason he gave for firing me) It was really because he was a fast food junkie and a meat-eater; I am health conscious and vegetarian. I decided not to fight him about it; and accepted it would be better to part company. He raved about what a great worker I am, and promised a wonderful reference for me; he just could not get past "our philosophical differences."

Even though I had lived and worked in FL for more than 20 years, at one time I owned my own company and employed up to 16 people for 10 years, had paid large sums into the UC system for all that time, I discovered I was not eligible to receive unemployment compensation at all in any amount. Not a dime.

To keep from losing my home I rented it out (could not sell it because it is not now worth what I paid for it). I am grateful I could rent it to keep from losing it.

I relocated to OK and am staying with relatives until I can get back on my feet. Everything I own is in storage except for my clothes. I sold and gave away as much as I could.

After 4 months of looking every single day for 8 to 10 hours a day, driving to wherever I needed (up to 2 hours) to get to a job interview, applying in surrounding states for anything I might remotely be eligible for, I was finally able to land a temporary position making about 1/2 what I used to make. I am extremely thankful to be employed and making that much. I depleted my savings account and was down to my last few dollars when hired for this position.

I have pared everything down to the bone. I pay a small amount of room and board for the room I sleep in, drive 62 miles one way to work, and I am working as diligently as I can to reduce my debt load to zero. In addition I am currently looking for anything I can do part time to make some extra money.

Life isn't easy. No one promised it would be easy. I believe the insurance industries (including unemployment compensation) promote the attitude of "entitlement". No one really benefits except for the insurance company (and of course the government agency).

I believe we should suck it up, either find work or make work if you can't find it, put money in savings and not depend on the government or any insurance company to bail you out.

It's time to take responsibility for our own lives and get government out of our business. It's obvious their plan for us isn't working, or at best it isn't working for everyone in the way most people want it to work.

If you want something, get off your duff and get out there and make it happen. This is America, the best place in the world to make a great life for yourself, so get out there and go for it.

Jul. 08 2010 10:38 PM
Ashley from Toledo, Ohio

I live in Ohio and I have a college degree and have been laid off for a year. I think the government needs a program to relocate people, because there are NO jobs in Ohio. My idea is to create a database of unemployed and if there is a job one qualifies for- then the government pays your moving expenses. Then the person is back to work and not recieving umemployment benefits. It is a win-win- A girl can dream! :)

Jul. 07 2010 02:10 PM

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