Thursday, March 25, 2010

Does It Matter Whether Unemployment is Socially Productive?

Evidence that unemployment insurance causes more unemployment is easy to find. So a few stimulus law advocates (recall that actual and prospective stimulus laws spend significant $ on unemployment insurance programs) have embraced that evidence, claiming that workers can gain something by being unemployed longer, because they can search for a better job.

Suppose for a moment that their claim -- unemployment time is socially productive -- is correct. Still, the claim does not rationalize unemployment insurance. Actually working is productive too, that's why people get paid for doing it. And it's widely recognized that the observed behavioral reactions occur because unemployment insurance subsidizes unemployment relative to working. Efficiency is lost whenever one productive activity is subsidized relative to another. In other words, the argument that unemployment insurance is inefficient in no way relies on an assumption that unemployment is entirely wasteful.

The marketplace involves a myriad of decisions between alternate productive activities, and the case for subsidies happens only when the market by itself would excessively favor one over the other.

So if you want to defend unemployment insurance on the grounds that unemployment is productive, you need to further argue that the market by itself results in too little unemployment, so that unemployment insurance helps ensure that we get the extra unemployment that society needs!

Such a claim would be logical, and perhaps even correct, but I predict that stimulus law advocates are unwilling to make it.

5 comments:

Don said...

"So if you want to defend unemployment insurance on the grounds that unemployment is productive, you need to further argue that the market by itself results in too little unemployment, so that unemployment insurance helps ensure that we get the extra unemployment that society needs!"

I believe that there is some truth to this. If you are offered a crap job, UI can allow you to wait a while economically to see if you can get a better job. If you're really worth it, it is arguably better that you're in a more suitable and productive job. ( One caveat: It might be illegal to turn down the job and receive UI ).

It doesn't make a lot of sense to turn down a good job on UI, since you might not be able to find a similar one when the benefits run out.

That still doesn't negate the fact that UI can be a disincentive for some people. I don't get the problem. No policy or program is perfect.

The only thing I can imagine is that, if you admit UI is a Disincentive, you're believed to be arguing against the entire program and policy.

I'm for a Guaranteed Income. If I mention that Friedman, Murray, and Hayek were for it, some people automatically believe it must be some kind of ruse to impoverish people, instead of being a program aimed directly at the poor. There's not much to say to such people.

Don the libertarian Democrat

Alberto said...

Don, I don't think Friedman was for guaranteed income. I could be wrong, but I think he simply argued that given that the government was hell bent on caring for poor people, giving money directly to poor individuals (via the EIC) would be more more efficient than having the government deliver specific goods and/or services.

TGGP said...

I came across this on the labor market during the recent recession via Arnold Kling. No mention of minimum wage or mortage modification, though the the disincentives provided by unemployment insurance gets a paragraph.

Alberto, EITC is a reduced version of Friedman's proposal for a "negative income tax". The Guaranteed Minimum Income applies universally, so there is no implicit marginal tax-hike due to means-testing.

TGGP said...

Support for the last sentence of my previous comment here.

Zenchukovskiy said...

Thanks. I thought you were going to tell about the pluses of being unemployed. Everything you write is true. I'm gonna custom essay on this topic for my University.