Almost a year ago, I wondered if extending unemployment benefits made sense. This month Congress was at it again, taxing the working to pay the non-working and borrowing from America’s children to pay the currently middle-aged (H.R. 3548). I had dinner Friday night with a very capable 40-something woman. She stayed home with her three children until 2006, then found an entry-level job at an architecture firm. Due to her intelligence and energy, she was quickly given additional responsibilities. However, she found herself laid off in the fall 2008 economic collapse. What has she been doing for the past 12 months? “I go to a Web site every week and answer five yes/no questions by clicking the mouse,” she answered. “They don’t ask me if I’ve actually looked for a job, just if I’ve been available for full-time work. Then they send me a check.”
How do her unemployment checks compare to her former earnings? “I had downtown parking fees deducted from my payroll checks, plus a bunch of other stuff. The difference in take-home pay is only about $100 per month. Because I get health insurance through my husband’s employer, I have no financial incentive to look for a job.”
Related: My July 2008 review of The Forgotten Man, a history of the Great Depression that shows that “virtually every action by Hoover, Roosevelt (FDR), and Congress hindered the U.S. economy”.
You’re looking at unemployment checks in MA. In NH, ME, and VT the payments are quite a bit lower and the impact is different. Drawing a national conclusion based on only one sample is deceptive. MA, NY, and CT have higher unemployment checks than most of the other states.
In most states unemployment checks are not a major replacement of income. Even without counting all your friend’s deductions from her earlier paychecks, unemployment buys some groceries, but making ends meet isn’t easy or in some cases even possible.
Note also that your friend lives in a familiy with a second income that also pays for health insurance.
In short, your friend is – fortunately for her – a special case.
While it might be theoretically possible that the economy would recover faster without any assistance, there would be great harm to US citizens. Our parent’s generation all knew people who had lost everything they worked for, committed suicide, had unaddressed health issues, and other problems caused by the depression. Assistance programs help mitigate that and set up a benefit for future effective economic use of our population: good health, good education and good training and experience.
It’s not perfect – any system can and will have flaws and ways of being misapplied, gamed or misused. But it’s a damn sight better than people starving.
Tangozulu: Actually the dinner was in Washington, D.C. and the anecdote concerns a woman from an industrial heartland state, not from New England (a sobering example for those who believe in the inevitable cyclical nature of employment; most of our factories moved south 100 years ago and a factory worker who had sat at home waiting for the upturn would still be waiting). Your argument that government tinkering with the job market benefits workers is not supported by The Forgotten Man nor by classical economics (which predicts that in a free market for labor there can be no involuntary unemployment, as wages will fall during a recession until the market clears). My original argument against indefinite unemployment benefits is that a worker’s resume and skills are injured by prolonged periods of unemployment and the government is not doing workers a favor by encouraging them to stay home. I would not want to hire someone who had spent a year at home watching TV when I had the alternative of hiring someone who had displayed energy and imagination in finding a job, perhaps temporarily migrating to China or Brazil for work.
As far as people starving without government assistance, that’s a separate issue and we have separate government agencies to deal with that problem. There are more than 100,000 federal employees at the USDA, which runs the Food Stamp program, and overall spends roughly $100 billion each year intervening in the market for food. http://www.bls.gov/oco/ocos060.htm says that approximately 600,000 social workers are employed here in the U.S. The IRS administers the Earned Income Tax Credit. State and local governments run their own poverty relief programs. The 50 states run Medicaid, with federal assistance. It could soon be the case that more Americans are employed by the government in the poverty industry than work in manufacturing.
The best thing that the government of a capitalist country can do for a worker is create an environment in which businesses are comfortable investing, which will increase the number of jobs available and the wages paid. In a socialist country the government that wants to help a worker will hire that worker directly into one of its government-run enterprises. I cannot think of an economic system in which it makes sense for a government to send potential workers checks every month so that they will stay at home.
So you think the unemployment rate is 10.2 % because people are choosing to claim benefits instead of looking for a job? Or because they refused the job offer in China? This does not seem credible.
Just because you have a friend who is not looking for a job does not mean that everyone else is acting that way. And the benefits will eventually run out, as they have for many people. Better advice would be to consider starting a small company while you are still receiving a check from the state because for the people who are just sending out resumes and praying for things to change; this is going to be long nightmare. I also recommend a PBS frontline program on the subject if you have not already seen it. It helps put a face on the issue. Link below
http://www.pbs.org/wgbh/pages/frontline/closetohome/view/?utm_campaign=viewpage&utm_medium=grid&utm_source=grid
I have sent and delivered over 750 resumes all over the United States in search of a job. I can not afford to move but if a company is willing to pay for my moving expenses then I am ready and will to leave my family, rip my son out of school and move across the world just to be able to work again. My unemployment ran out. I live where ever I can and my son stays with my parents. No I don’t want to sit at home and everyone has to prove where and when they search for a job. It is not as easy as your freind makes is sound. I had to go in person the UI off every two weeks to prove that I had searched for work. I work on farms and in temp jobs just to give my parents money to feed my son. Do you really think I want to lose my $22.00 job for this! I think your judging the unemployed wrongly. Most of us have worked an will work given the opportunity.
Mari: I did not mean to suggest that the woman described in the original posting was typical of the unemployed. She is fortunate to have a spouse with a job, for one thing. Nor am I judging her; I believe that she is behaving rationally. Unemployment insurance works best when the economy is structurally stable. One company may fade from the scene, but a competitor expands to take over its workers. Unemployment insurance for six months gives a worker time to look for a job, possibly move to a new state, and perhaps take a short training course.
The U.S. economy, however, has been dramatically restructured over the last few years. A much larger proportion of society’s wealth is flowing to Wall Street, the health care industry, government workers, and government/union retirees. Shifting so much money means that there has to be a dramatic shift in the kinds of jobs that are available. We’re not doing people a favor by sending them a check and saying “Just wait another 6 months and a similar job to your old one should become available in your region.” (Similarly we are not doing average teenagers a favor by keeping minimum wages, payroll taxes, and the expenses of dealing with bureaucracy so high that it doesn’t make economic sense for a business to hire any but the most energetic, responsible, and educated teens.)
Americans are unemployed because it doesn’t make economic sense for a company to hire those people in the current regulatory and tax environment. Stripping away temporary gimmicks such as stimulus spending and extended unemployment benefits, the government’s main response to the situation has been to add additional business regulations (e.g., the new health care mandates) and raise tax rates.
@Cornelius – in most states, starting a business while on UI means the recipient is no longer eligible for UI benefits since you will now be self-employed.
A handful of states: Delaware, Maine, Maryland, New Jersey, New York, Oregon and Pennsylvania (cf. http://www.ows.doleta.gov/unemploy/self.asp) give you the option of continuing to receive UI benefits while starting your business.
@philg – your friend is (most likely) in violation of the terms under which she collects UI benefits. In the majority of states (all but 3) UI benefits are funded through employer taxes only. Arguably, an unemployed person may consider that UI benefits are a return on their earlier (indirect) contributions. Most states randomly audit UI beneficiaries to minimize this sort of abuse.
“[classical economics] predicts that in a free market for labor there can be no involuntary unemployment, as wages will fall during a recession until the market clears”
Unfortunately, in practice, nominal prices (including wages) tend to be “sticky”: they take a long time to adjust downward. If there’s a sustained shortfall in demand, it’s quite possible for there to be a sustained surplus (in the labor market, a high unemployment rate). If prices weren’t sticky, recessions would never occur in the first place!
Greg Mankiw:
Mankiw goes on to give various theoretical explanations for price stickiness, but the important thing is that it occurs in practice.
The Economist reviews a book by Truman Bewley on wage stickiness:
But the laid-off employees will presumably take a pay cut to find a new job if necessary, so average wages will still decline, not so?
Stephen: Mancur Olson (see http://philip.greenspun.com/blog/2009/03/16/how-rich-countries-die/ ) divided the economy into fixed-price and flexprice sectors. Wages will decline in the flexprice sector during a recession, so you’ll pay less for babysitting or housecleaning. But your property taxes may rise and government workers will get raises, increased pension checks, etc.
Stephen: “But the laid-off employees will presumably take a pay cut to find a new job if necessary, so average wages will still decline, not so?”
No, unfortunately. Other firms, following the same reasoning, will also be laying off workers rather than cutting wages, and so they won’t be hiring either. Rather than the laid-off workers taking a new job at lower pay, they won’t be able to find a job at all.
Here’s the actual data. This graph of historical data from the Bureau of Labor Statistics shows that the month-by-month change in hourly wages of production workers hasn’t dropped below zero, despite the recession.
You can refer to all of the texts and economists you like, but the simple fact is that as unemployment benefits are extended, many folks will continue to collect and NOT look for a job.
Even though the monthly income may be lower, if a person can live on that income, they’ll collect until 2 weeks before unemployment runs out (at 97 weeks).