Employment remains remarkably low five years after the housing market began its decline and four years after the financial crisis. During that time, the social safety net – government programs that help people without jobs and otherwise with low incomes – adopted new rules that made programs more inclusive and more generous.
I do not think this is all a coincidence. By increasing its support for people without jobs and those with low incomes, our government has helped expand the population of people without jobs and with low incomes.
The more generous the safety net, the less the incentives for labor-market participants to seek, retain and create jobs.
Economists often acknowledge that the safety net reduces employment through its effects on incentives; the real debates are about the magnitudes of such effects. However, in recent years, many economists have too often overlooked a couple of steps in determining that magnitude.
The first thing often overlooked is the multitude of policy levers affecting safety-net generosity and thereby incentives to seek, retain and create jobs. One particular policy lever gets a lot of publicity – the maximum number of weeks that unemployed people can receive unemployment insurance benefits. It is just one of many.
Federal and state governments have pulled many more levers in recent years. A bonus was added to unemployment checks, people were offered subsidies to pay for their health insurance after layoffs, food-stamp benefit levels were increased, food stamp and unemployment insurance were made available in situations in which they were formerly unavailable and states were granted waivers from program work requirements.
Any one of those might have a minor effect on the labor market. The sum of all of them is a large effect on the incentives to seek, retain and create jobs and ultimately the amount that people are working.
While economists seek to quantify the effect of unemployment insurance on job-seeking behavior, they often overlook the effects of the safety net on incentives to retain and create jobs.
Employers sometimes experience reductions in demand from their customers, as auto manufacturers and home builders did early in the recession. One way they react is to lay off part of their work force. But they could also adapt to less demand by work-sharing, reducing prices charged their customers (or increasing those prices less than the general rate of inflation) or reducing wages.
Smart employers recognize that one of these adjustments – layoffs – brings forth help from the government through its safety-net programs (on behalf of employees), while the others do not. If the safety net were less generous, there would be fewer layoffs during a recession: employers would adjust less with layoffs and more in those other ways.
Thus, even if it were true that the unemployed completely ignored the safety net’s generosity in their decisions to seek and accept jobs, the safety net would still increase unemployment during a recession by increasing layoffs and reducing job creation.
None of this necessarily implies that the safety net is too generous. Helping the poor and economically vulnerable is intrinsically valuable. But it’s incorrect to ignore the price of safety-net generosity.