Thursday, June 10, 2010

When you stop paying people who don't work, more people end up working

I first brought this up in a post last February: the untold story behind today's unemployment, and it's worth bringing up again because the data are now moving in a positive direction. So far this year there has been a reduction of over 2 million in the number of persons receiving unemployment insurance. This may go a long way to explaining why there has been an increase of 1.3 million in the number of people working this year in the private sector. I'll repeat here what I said last February, since it is still meaningful today:

The number and proportion of persons receiving unemployment insurance today is far greater than anything we've seen before. Even though this recession's highest unemployment rate of 10.1% was lower than the highest unemployment rate (10.8%) of the 1981-82 recession, the portion of the workforce receiving unemployment compensation today is 63% higher than it was at the peak of the 1982 recession. Fully 78% of those looking for a job today are receiving unemployment insurance, compared to only 38% at the height of the 81-82 recession.

Never before have we seen anything even close to today's largesse and compassion for those without a job. While not wanting to argue whether this is right or wrong, I would however argue that the aggregate desire of the unemployed to find a job today is undoubtedly much less than it was during the depths of the 81-82 recession.

And so we have here one more reason why this recovery is proceeding more slowly and painfully than we all would like to see. Not only are employers reluctant to hire because of all the legislative, political, and tax uncertainty out there, but the incentive for workers to seek out the jobs on offer is weaker than ever, especially for those jobs that don't come equipped with salaries exceeding their current exceptional benefits. Congressional compassion has its costs, and they are not just measured in terms of expenditures, but also in a slower recovery.


brodero said...

"the aggregate desire of the unemployed to find a job today is undoubtedly much less than it was during the depths of the 81-82 recession."

Having lived through both eras
I respectfully disagree....

txt me said...

It's great being lectured on the fine points of the 'desire of the unemployed' by a wealthy Malibu resident. The Internets will never cease to amaze me.

W.E. Heasley said...

Mr. Grannis:

You are very, very correct.

Extended and enhanced unemployment compensation clearly creates a moral hazard generating into a disincentive and its not confined to the margin. We know from empirical studies looking at unemployment compensation duration, that unemployed workers collecting unemployment benefits, on the average, begin to earnestly look for employment four to six weeks before unemployment compensation runs out. Hence if you continue extending unemployment compensation duration you merely push-out the four to six week window of earnest job interviewing.

The enhanced amount of unemployment creates a disincentive situation where many jobs available marginally less than unemployment compensation hence the unemployed worker, through self interest, remains on unemployment compensation as the enhance amount of benefit is greater than the wages of the labor market job openings.

Basic economics of incentives and disincentives.

“Not only are employers reluctant to hire because of all the legislative, political, and tax uncertainty out there…”. This is very true as well.

Government through political-economy has set headwinds of monumental proportion regarding an employer’s incentive/disincentive for expanding employment. Too much uncertainty and disincentive. With the average work week creeping up steadily, its clear the employer have chosen to/been incentivized to expand core employees hours rather than the disincentive (uncertainty/headwinds) of adding employees.

Moreover, why the enhanced benefit and expanded duration of unemployment compensation? Is it really compassion or is it Keynesian economics?

Keynesians, Neo-Keynesians and New Keynesians have a theory regarding the Great Depression. They insist that the depression was prolonged because state and local governments reduced spending to align with reduced revenue and that the federal government did not deficit spend enough.

However, common thread conclusions of the empirical economic studies of the Great Depression regarding unemployment (that Summers, Romer, Bernstein and Goolsbee conveniently omit) are:

(1) private capital formation leads to private sector jobs,

(2) rising business and consumer taxes, at the federal, state, and local level during the Great Depression depressed private capital formation hence depressing private sector job creation,

(3) rising regulation during the depression reduced profits at the margin lending downward pressure on private sector job creation.

So here we are in the Great Keynesian Experiment: deficit spending (stimulus plan) to prop up state and local government spending. Rather than the WPA, TVA and the alphabet soup of make work programs of the FDR administration, Keynesians merely substitute by expanding and enhancing unemployment compensation. Unprecedented federal deficit spending. To put a cheery on top, Keynesians are raising taxes in many areas hence affecting private capital formation.

Nice result huh?

DouglasR said...

This is grotesque. There is a huge difference between young single folk who have seasonal jobs and hang with their buds for a while before hitting the pavement to get a new job, and heads of household who have been laid off because of serious mismanagement on many levels regardless of how wonderful that person's work ethic/product has been, or how desperately they need a job.

An example of how far removed analysis and comfy theorizing can get from what is happening on the street level. It boggles the mind.