Do unemployment benefits discourage people from working?

I noticed that the latest jobs report showed that the percentage of work-eligible Americans working was at a 38-year-low.

CNS News reports:

A record 93,626,000 Americans 16 or older did not participate in the nation’s labor force in June, as the labor force participation rate dropped to 62.6 percent, a 38-year low, according to the Bureau of Labor Statistics.

In June, according to BLS, the nation’s civilian noninstitutional population, consisting of all people 16 or older who were not in the military or an institution, hit 250,663,000. Of those, 157,037,000 participated in the labor force by either holding a job or actively seeking one.

Now, let me ask you this. Does paying people to not work cause more people to not work? It seems to me that whatever you subsidize, you get more of, and whatever you tax, you get less of.

Now look at this article from the radically-leftist New York Times.

It says:

Before this recession, most economists probably thought that some amount of unemployment benefits were just and compassionate, and offered a sense of security even to people who were lucky enough to retain their jobs, despite the fact that the program would raise unemployment rates and reduce both employment and economic output.

In other words, unemployment benefits shrink the economy to some degree, but shrinking the economy a bit may be a price worth paying.

Unemployment benefits were thought to reduce employment and output because, by definition, working people were ineligible for the benefits. In particular, an unemployed person who finds and starts a new job, or returns to working at his previous job, is supposed to give up his unemployment benefits. Economists had found that a large fraction of unemployed people delay going back to work solely because the unemployment insurance program was paying them for not working.

Here’s a new study explaining how the “generosity” of the big government Democrat Party actually encourages people to avoid working, and to remain dependent on the government for their “income”.

A study published by two labor economists, Stepan Jurajda and Frederick J. Tannery, looked at employment histories for unemployment insurance recipients in Pittsburgh in the early 1980s. Unemployment rates got quite high in Pittsburgh in those days, reaching 16 percent at one point, and staying over 10 percent for two and a half years.

The chart below summarizes their findings for Pittsburgh.

The chart displays the fraction of persons (in Pittsburgh) receiving unemployment benefits who began working again, as a function of the number of weeks until their unemployment benefits were scheduled to be exhausted. For example, a “hazard” value of “0.04″ for week “-14″ means that, among unemployed persons with 14 weeks remaining until their benefit exhaustion date, 4 percent of them either began working a new job or returned to their previous job.

The chart:

Unemployment offers a disincentive to find work
Unemployment benefits offer a disincentive for Americans to find work

The most troubling thing about this is what is not said in the chart or the study – think about the children growing up in these households where their parents, especially the fathers, are not working. What are they learning about self-sufficiency and the role of government? They are the ones who we are going to task with paying for our lavish entitlement programs in the future. Are people who think that dependency on government is normal being trained to pay for the exploding costs of Social Security and Medicare?

8 thoughts on “Do unemployment benefits discourage people from working?”

  1. A thing that has been noted by many economists (including, IIRC, Digby Jones in Fixing Britain) is that when the government doesn’t raise the minimum wage correspondingly to inflation, but instead decides to add money to the “buffer” of welfare, we find two socioeconomic groups forming:

    1: The working poor. People who are employed full time on minimum wage, unable to claim any kind of benefit because they are employed full time and earning the minimum wage, yet living paycheck to paycheck. These people are normally undereducated (dropouts before or at high school) or underemployed (educated but finding no work in their field), with more than one child and some debt. Accounting for child care and tax, they would be better off on benefits, but the waiting period before receiving benefits is so long that the few pounds they have in savings would be long gone before they saw any government money, leaving them and their children on the street.

    2: The lock-in benefits. People who are unemployed and in a similar position to the working poor, where the only employment they could find would be minimum wage. Again, they are often with children and debt. If they sought employment their standard of living would drop drastically and they would join the working poor, possibly never to leave. They are also guaranteed emergency money and the possibility of a council house if there is any risk their children could become destitute. So they stay on benefits and live comfortably.

    If the minimum wage were a living wage increased relative to inflation and unemployment benefits were always lower than the minimum wage after tax a lot of these problems would go away. As it is, not only is there no incentive to get work, for many working would make them poorer.

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      1. It’s not doubling and tripling. It’s just ensuring that after taxes the lowest paid people aren’t borderline homeless. If the minimum wage isn’t raised to match inflation, eventually the lowest paid people will be outpriced and end up on benefits.

        The small business problem is another one entirely and that is that they are too easily out competed by big businesses on every single front. Minimum wage increases are the final nail in the coffin, not the cause. Otherwise large corporations, that rely much more heavily on minimum wage employees than small businesses, would also be facing problems making ends meet. The reality is that large corporations get more tax breaks and have a larger profit margin to play with, meaning they can survive the increase in minimum wages, whereas a small business has less margin to work with and therefore can’t balance the books after an increase in costs of any kind.

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        1. OK, there’s a study in that link I sent you that shows what happens when you raise minimum wage. If you are in favor of raising unemployment, especially for the young, minority workers, then there’s nothing I can do to stop you. If you raise the cost of labor to job creators, then fewer people will be hired. There will be more automation, outsourcing and expansion abroad rather than at home.

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          1. Automation happens anyway. Companies aren’t charities and as tech becomes cheaper and the cost of living goes up, people become more expensive. The solution isn’t to keep a flat minimum wage and ignore inflation until people can’t afford to work. The UK tried that and unemployment skyrocketed. The only two solutions are:
            1 Abolish minimum wage and leave salaries entirely in the hands of the employees, ie, let them sell themselves for what they think they are worth.
            2 Raise minimum wage whenever inflation raises the cost of living.

            As for unemployment, correlation does not equal causation, as, again the UK found out. If you want studies on what happens when a living wage is implemented, try London, not theory land.

            http://cep.lse.ac.uk/pubs/download/dp1007.pdf

            http://cep.lse.ac.uk/pubs/download/dp1177.pdf

            http://www.geog.qmul.ac.uk/livingwage/pdf/Livingwagecostsandbenefits.pdf

            http://www.ft.com/cms/s/0/63bd63d2-77a1-11e3-807e-00144feabdc0.html

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  2. We pay out more than we bring in. You can’t have 94 million not working. That means the 157 Million participating or looking for a job in the civilian force are supporting the government employed, Social Security, Welfare and yada yada. It doesn’t take a mathematician to see the imbalance here. We don’t have enough private taxpayers to support the lavishness of neighbors who think their working neighbor should feed them, cloth them, pay their rent, pay their medical and pay their retirement. We will be Greece soon.

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