Unemployment Benefits: Perverse Incentives
Couch, meet ass.
Couch, get really, really used to ass.
Robert P. Murphy writes at the Foundation for Economic Education:
A new NBER working paper by Marcus Hagedorn, Iourii Manovskii, and Kurt Mitman estimates that the abrupt end of unemployment benefit extensions led to 1.8 million additional new US jobs created in 2014.The theory here is straightforward: when the government subsidizes an activity, other things equal, people will engage in more of it.
If politicians want to encourage more people to go to college, what do they do? Provide financial support, either directly in the form of tuition assistance, or indirectly through loans with lower interest rates than students could obtain in a free market. If politicians want to encourage people to reduce their consumption of fossil fuels, they might offer tax rebates for the purchase of electric cars or insulation in their homes.
By the same token, then, suppose that politicians wanted to encourage laid-off workers to refrain from accepting a new job. What would they do? Naturally, they would offer to send the jobless workers checks so long as they remained unemployed.
Eh. Flimsy.
Ppen at February 26, 2015 12:18 AM
"..the end of benefits..led to additional jobs being created"
Hey, Rad, does your Nizkor fallacy tutorial apply to this leap in reasoning also?
And where were these 1.8 million additional jobs created?
And anyone who thinks people are happy and living it up on unemployment 'benefits' needs to try it sometime. A couple hundred a week (max), and it ain't tax-free either. You can really live it up with kale like that, friend.
DrCos at February 26, 2015 2:56 AM
If this evidence is so flimsy how do you explain the bump in hiring just as people's unemployment runs out?
Ben at February 26, 2015 5:34 AM
If this evidence is so flimsy how do you explain the bump in hiring just as people's unemployment runs out?
That's the Roaring Obama Recovery!
You'd have to break it down, but I suspect that you'll find that suddenly people who've been holding out for a decent enough job have motivation to accept any job.
Living on unemployment >> living on any job >> living on welfare.
I R A Darth Aggie at February 26, 2015 7:18 AM
There are some instances where people had good-paying jobs in the past, and now their egos won't "permit" them to accept low-wage work. Maybe they just need to suck it up and accept that the salad days are over.
But mostly, I think all of the unemployed could wake up tomorrow with the work ethic of an 18th-century coal miner and there simply wouldn't be enough jobs to go around. And although it sounds great to say, 'Start your own business!' take note that there are more businesses dying now than there are being born. So for 99% of people who take that advice, they will simply end up more broke than they are now.
Don't have kids.
Pirate Jo at February 26, 2015 8:37 AM
Do we know how unemployment benefits work? In most states, you have to be actively looking for work.
You cannot 'turn down' jobs you think are beneath you and continue to get benefits.
There's no magical switch that happens when your (bountiful) benefits run out.
What do you think unemployed people do all day? You might catch a bus to the library. Not like you can afford cable and internet and entertainment when you're on the dole like most people think it is.
Try it out for a couple months or years, then let us know.
drcos at February 26, 2015 9:25 AM
So, let me make sure I have the writer's thesis correct here . . .
1. Unemployment benefits run out. This then causes . . .
2. People to get off the couch and look for work. Which then leads to . . .
3. 1.8 million jobs being created.
That train wreck of post hoc / propter hoc reasoning isn't up to the usual standards of your column Ms Alkon.
Railmeat at February 26, 2015 9:33 AM
I got laid off last February and went onto unemployment. Before taxes it paid less than half of my previous after tax earnings. I was required by the state to register into their jobs database that matches you to job postings. Do you want to know how many jobs it matched me to in those 6 months? It was exactly two jobs, and those were both on-call jobs with no guaranteed work out of it beyond the initial two days of training. I was required by the state to apply for 3 jobs a week plus do at least 2 other job-seeking activities per week (workshops, trainings, applying for additional jobs, etc). I had to provide them what the job was and all the contact information to them so they can check this out if you don't get hired quickly. It was loads of fun doing this, because I was lucky to find even one job a week that matched anything I had, training, education, or experience in. I had to apply to all sorts of jobs I knew I would never get called for to meet the requirements to keep my checks coming. During all this I was offered two jobs that turned out to only pay minimum wage, and I did not have to accept them because the state at least set a minimum wage based on your salary history, field of work, and what the average wage for that in the area was and then a certain percentage below that. When all was calculated, I had to accept anything paying above $18.50, which was still significantly less than what I was making, and also double minimum wage. If not for my husband I wouldn't have been able to afford to pay my monthly expenses on unemployment, let alone the minimum wage jobs I was offered. If I had no one else to rely on I would have taken the minimum wage job at the end of my unemployment payments, because then I would have qualified for all the welfare benefits offered for me and my kids to get by that I wouldn't be able to get without a job. I don't know how other states work for unemployment, but it's not just a relaxing time of leisure.
BunnyGirl at February 26, 2015 11:26 AM
When my previous employer closed, I went on unemployment like everyone else who was let go. I was required to look for work/fill out apps/go on interviews at least 3 days a week. After 8 weeks of pounding the pavement, I was offered a full-time position where the pay was so low, I could not even make rent - food and gas were out of the question. There was no minimum salary requirements in my state at that time - you were required to take whatever was offered to you. My benefits were eliminated because I did not take that position. Thank God I found an excellent position within a month after that because I would have probably been homeless and needing the local food pantry otherwise. The person at the unemployment office was not impressed when I explained the irony of them taking away my government benefits, thus forcing me to possibly go on other government benefits while looking for a new job so I could pay for government benefits for someone else.
Kima at February 26, 2015 2:25 PM
What do you think unemployed people do all day?
Lady down the street from me spent her time with her horses
lujlp at February 26, 2015 4:16 PM
One of the things I noticed about myself when I went on unemployment is that I would start out full blast trying to find a job. After a few weeks, I would get used to the idea of not having to put up with bosses yelling at me and would stop trying so hard.
When I knew that my benefits were about to run out, I would pick up the pace again.
Fayd at February 26, 2015 4:41 PM
"By introducing financial payments during unemployment, the government tips the scales in favor of a longer search before accepting an offer."
Sort of true . . .
"By introducing financial payments during unemployment, the government tips the scales in favor of a longer search before accepting any crappy offer."
There, I fixed it.
Also, there is the fact that what sometimes they claim is a jump in "new jobs" is really a twisting of words when they are looking at the unemployment "numbers" going down.
Well, yea, the unemployment numbers went down since they only count as "unemployed" those who actually collect unemployment. It doesn't take a rocket scientist (nor should it take an economist, either) to know that when someone isn't working and not collecting unemployment benefits they aren't counted under the government numbers; but are still truly unemployed.
charles at February 26, 2015 5:56 PM
Those filthy layabouts. No wonder America's brilliant CEOs got rid of them. Deadwood! The lot of them!
Next analysis: the bump in CEO compensation for short term profits generated by laying off large numbers of employees.
Gog_Magog_Carpet_Reclaimers at February 26, 2015 6:12 PM
Bunnygirl, I feel ya - it happened to me, too. I took a job that paid half what I was making before and liquidated some of my 401K to pay off the remaining mortgage I had, so that I could keep getting by without losing money every month. Once the mortgage was paid off, I could survive on half what I had been making before, but only because I don't have kids and didn't have any other debt.
My entire system of priorities changed. I realized that long gone were the days when you could find another job in three months. I realized that a 401K would not "always go up 10% every year" and "my house would never lose value." Isn't it silly that we ever thought that? Yet for decades it had always been true, and that's what the nice people selling houses and 401Ks always said.
Pirate Jo at February 26, 2015 7:17 PM
While silly Jo, it certainly was common. On the bright side if you can get through this hump your new priorities and fears can be helpful. Better times will return and I hope you make it to them.
Back on topic, there are still those who claim unemployment benefits are a net positive. The sudden national cutoff showed how big a lie that is. The Keynesian multiplier is around 0.8, not 1.2. With that said, not everything is about making money. There are good moral arguments for unemployment benefits, just not economic ones.
Ben at February 26, 2015 8:09 PM
BunnyGirl's experience sounds rather similar to mine...but I took a class (at night designed for working people) and that got me classified as a student rather than a job seeker so lost my benefits.
Then again, one of the people laid off with me partied it up for the first year some how -- then had trouble finding a job.
Here is another weird one that I heard on the radio talk show back during the bad days. The lady said she had been out of work for a little over year and was on the extend benefits. She was offered a job sorta similar to what she had been doing but paid a lot less - only slightly better than unemployment and she thought it might be good for contacts. It was only a 2 month contract (or something like that). At the end of the contract she has to go back on unemployment but now it is based on those 2 months pay since it was over a year from the other work -- she went from the maximum unemployment to the minimum....as she said she never should have taken the job.
The Former Banker at February 26, 2015 8:14 PM
Really, the only jobs unemployment stops you from taking are side jobs or contract jobs (not 'under the table' jobs), as whatever you make on those is deducted from your 'benefits'.
Not saying it's a bad thing or good thing, it's just a thing. I don't have the answer to how to help, but letting all the money trickle and flow upwards only benefits the folks on top.
DrCos at February 27, 2015 3:49 AM
Thank you, Ben. As a matter of fact, better times have already returned. After a year in that barely-scraping-by job, I landed one that paid better than I had ever been paid before. It was also the most boring job I've ever had. It was so boring it made me wake up every morning wishing I had died in my sleep, but I stuck with it for two and a half years and restored my savings and retirement balances.
Now I'm semi-retired. I'm still in my paid-off home and still debt-free, living in an area where my property taxes only cost $1,600 a year. I keep enough in a savings account to buy a used car when the one I have croaks. I take six months off at a time, then take six months of contract work, then back to several months off, and so on. I roll around with enough cash in my checking account to live on for a year, just in case a good contract gig is hard to find and takes a little extra time. I pay a fraction of the income and payroll taxes I used to pay.
I don't particularly enjoy work and would rather take half the year off while I am still young enough and in good enough health to enjoy the time. I don't care about saving enough to pay for a nice nursing home someday, because I'll eat a bullet before I go into one.
I don't want to buy a nicer home and go back to having a mortgage and I don't want to work all year long just so that I have extra money to throw into the financial system. I no longer trust the financial system, for the simple reason that fraud within it is not punished. I no longer trust financial planners, either, so I don't have one.
Remember the study where they offered a kid a marshmallow and told him if he could sit there without eating it while the researcher left the room, the researcher would come back with a second one and he could have two? They thought they were measuring how much self-discipline the kid had, but it really turned out to be a measure of how much he trusted the adults making the promises.
I have turned into the kid who doesn't trust the promises and eats the marshmallow. I live for right now. I'll probably continue to work part-time until I'm 70, and then I'll get by on a combination of a reverse mortgage and what nest egg I have.
I was raised with the old-fashioned German idea that delaying current gratification in exchange for future security is a virtue, but I don't believe that anymore. I think a lot of people who do are going to find they get neither.
Pirate Jo at February 27, 2015 9:23 AM
My husband and I decided I'd just stay home with the kids after seeing what my job prospects were and what the pay was like. We would have been losing a lot of money every month with needing childcare if I did get a job. There was no sense throwing money away just so I could get out of the house. My husband makes enough that we could afford to lose my income. Others are not so fortunate.
BunnyGirl at February 27, 2015 3:04 PM
It sounds like you learned some good lessons and some bad ones. Though I can't argue with the lifestyle you describe.
Debt is both morally and financially corrosive. There are some times when the benefits outweighs the costs but those situations are few and far between. Many people spend a third of their life working to pay the tax man and a third of their life working to pay the banker leaving little left over for themselves.
And while I view financial planning as a virtue I agree many financial planners are incompetent and harmful. A conundrum in that business is if a stock broker or financial planner is truly skilled and can make lots of money they wouldn't be a stock broker or financial planner. If we could speak privately I would offer better advice and consider it a mitzvah, but I don't see how that is possible. Absent that the best advice I have is don't do anything you don't understand. The financial business is full of hucksters. If you don't understand how everyone gets paid you are probably getting screwed.
And while I like the marshmallow test it does have some failings. I have a cousin who passed with flying colors. No mater how long they waited he could resist the marshmallow's temptation. He just doesn't like them.
Ben at February 27, 2015 3:09 PM
Ben, the way I see it, if your financial planner didn't see the crash of 2008 coming, then he is just a salesman and of no real use whatsoever.
One investment I kind of like is Lending Club - and I mean buying notes, not buying Lending Club stock. I buy notes on the secondhand market through the trading platform so that I can pick the ones with good payment history. It has been generating nice steady returns and is actually kind of fun.
Your story about your cousin cracked me up - I agree, an M&M would be more tempting.
Pirate Jo at February 28, 2015 6:52 AM
A lot of us saw the '08 crash coming but couldn't tell exactly when. But none of the 'us' are professional financial planners. I honestly have never followed any advice from a professional. Especially professional stock brokers. Stock guys are always trying to sell you the crap they want to get rid of. Or trying to churn your account so they get fees. It is one reason I really like online stock trading. No more jerk broker giving bad advice. Though ETrade does try to give you all the bad advice in electronic form.
I will admit I didn't see the recent oil crash coming. Though I probably should have. Once the dust settles it will be a good time to pickup oil stocks. I feel there is a high risk of a crash at the end of the Obama presidency. But that is still avoidable. The economy is very unbalanced right now.
Ben at February 28, 2015 7:31 AM
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