Tuesday, October 8, 2013

Unemployment insurance isn't a poverty program

This is in response to Unemployment Benefits Decrease Poverty? Really?!

I'd propose an indirect mechanism, which can therefore explain how the correlation can fail to emerge. Unemployment insurance acts as a stabilizing force, allowing families to maintain their lives despite unemployment. Under normal circumstances this would be a temporary effect, tiding them over until they find a new job and begin paying back into the system. In this way, unemployment would have a slight impact on poverty by means of giving people money, but the larger effect would be on maintaining demand, thereby keeping the economy growing. It would therefore have the effect of smoothing out some problems so that free markets can reduce poverty.

This falls apart in a sustained recession. If there are too few jobs to find, then the insurance will no longer be stabilizing the economy. It will instead be propping up people's lives, without being of much benefit to economic growth. In summary, unemployment insurance is a brilliant idea if we're in a short downturn, but not in a long-term economic malaise. It may still be morally justified to help people, but it is not a recovery program.

Of course merely bashing a program isn't of much help. From that we'd conclude that the correct decision is to simply end it. That would crash the economy and ruin many lives. Or end them. It is always good to remember that people can starve to death or die of exposure. Lack of proper nutrition will have a life-long impact on a child.

What are the alternatives then? Or what are the supplements that can be used to improve the program?

First, it is always good to have people in the same place as jobs. Government could offer increased benefits to people who move to areas with lower unemployment or pay some moving expenses. The housing problems don't help, since they may make people feel or actually be stuck in their present locations. Increasing the mobility of labor would decrease unemployment. Economic improvements tend to compound. Lower unemployment will cost fewer resources at all levels of government, while also bringing in greater tax revenues. Even with the buffer of unemployment insurance, we can expect some rise in demand from a family with income than one without, boosting the economy further.

Eliminating rules such as the minimum wage, protections for unions, and workplace safety would make employees less expensive and therefore would encourage hiring. However, in a weak job market and without collective bargaining, there is no guarantee that workers will be paid enough to survive on.

Encouraging hiring would help as well. This could come on the demand side, so that employers see greater benefits from hiring. However, demand-side boosting requires a massive expenditure and we've not yet seen the political will for a sufficiently large stimulus. Alternatively, giving everyone a bunch of currency, using inflation to cause a redistribution of wealth from rich to poor, as opposed to the poor to rich movement we see with most monetary policy, would provoke a backlash from the politically-influential group known as "rich people".

Employers could receive tax benefits for hiring, such as from a pass on payroll taxes. However these tend to be deficit-increasing as the economic growth and resulting revenues don't offset the tax expenditure. The employment boost may end when the tax subsidy ends, and such subsidies tend to encourage hiring for low-wage jobs to game the system. If done at the state level, then it is merely part of the pirating of jobs with no actual economic benefit, an absurd practice known as "tax competition."

Rather than making hiring more profitable, government could use policy to make firing less profitable. A tax on layoffs would add an incentive to retain workers, though the retention would be proportional to the size of the tax, and would reduce business flexibility. It is good, after all, to be able to get rid of workers who don't produce as much as they are paid. Furthermore, if the tax were too high, then we could expect hiring to be reduced due to uncertainty about the need for labor.


Steve said...

I have to wonder how long "temporary" is, as well as wonder how "normal" the circumstances have to be, particularly since the outlays increase the most during a recession. I would argue that unemployment insurance traps the most people when they need it the most.

You mention labor mobility, but moving is not as simple as offering a financial incentive. Given that people have a sizable chunk of their savings in this illiquid asset, how do you convince them? This option is quite pricy, and this doesn't even consider shadow pricing the costs of uprooting a family from their community.

Since there is the issue of reservation wages, the removal of both UI and minimum wage would require additional policies.

Regarding the demand-side stimulus, didn't we already try that with the American Recovery and Reinvestment Act of 2009?

Instead of receiving tax benefits for hiring, couldn't they receive a tax break instead?

If the government makes it difficult to fire people, you are correct that it would create a disincentive to hire. France is a textbook example of such a phenomenon.

Klepsacovic said...

By "normal" I meant circumstances such as an individual company laying people off or a short-term downturn, no more than a few months or a year. These would be things that aren't caused by systemic problems in the economy, but are just the normal turbulence that we expect in a dynamic economy.

One thing the country could use is a middle-class investment vehicle that isn't the house. It doesn't make much sense to put so much of our savings into something that cannot move with us and then ends up rooting people in one place.

The stimulus was too small to close the gap in demand.

Steve said...

Andrew, I don't want to go off on a tangent about the ARRA, but how much of a stimulus would have been enough? $1.5T? $4T? Under Keynesian theory, stimulus money has to be properly targeted immediately. There is both a delay in government implementation because bureaucracy doesn't move that quickly, and "properly targeted" implies that the government is privy to some information about which markets are best to invest in. Much like other ideologies, that works much better in theory than practice.

Coming to the issue of unemployment benefits, much like I stated in my blog, there is a much stronger case for unemployment benefits as a temporary safety net (operative word being "temporary") than their is to use it as poverty relief. Even if you make the argument that the safety net is still a necessity, there is still the issue that unemployment insurance modestly increases unemployment. Not that I am necessarily conceding to this point, but at best, unemployment insurance is a short-term, necessary evil. To counter the adverse effects on employment, there need to be alternative policies to cancel out the effect.

I agree with you about the idea that the house should not be a middle-class investment. The house is an illiquid asset that increases labor market rigidity. The government doesn't help when it artificially decreases the interest rates on housing. The bankers that are nefarious enough to partake in predatory lending don't help. Neither does the societal notion that owning a house is part of the "American Dream," whatever that's supposed to mean. All of these would need to be addressed to dissuade people from buying a house at excess demand.

Klepsacovic said...

"'properly targeted' implies that the government is privy to some information about which markets are best to invest in."
Not necessarily. Government may have the ability to take on tasks for which the risk or time of return on investment is too high for the private market, such as scientific research. Alternatively, markets such as infrastructure may be best served by a monopoly, but in that case, a government monopoly at least allows us to vote the suckers out.

My next post will be an attack on the term "necessary evil".

I wonder if a different concept of ownership could help with housing. I have no further ideas on this, just that somehow shifting away from the strict pairing of family/individual with a particular piece of property, but not necessarily toward renting or collectivisation.

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