Against Extending Unemployment Benefits—Posner

I do not favor extending unemployment benefits. The bill signed into law by the President last Wednesday would extend unemployment benefits by up to 13 weeks (depending on a state’s unemployment rate) for persons, estimated to number some 2.3 million, who have been unemployed for six months or longer, up to a maximum of 99 weeks (almost two years), at a total cost to the government estimated at $34 billion.

 

I would not object to the government’s giving the states some fraction of $34 billion to enable them to make additional welfare payments to persons experiencing serious economic hardship. But extending unemployment benefits beyond the standard six-month limit is a bad idea.

 

As Becker points out, the total amount of the additional benefits is too small to have a significant positive effect on employment—and for the further reason that a transfer payment cannot be assumed to have a positive effect on consumption or investment. The effect will depend on what the recipient of the transfer does with it. If he saves it, at least in an inert form such as cash or a federally insured demand deposit that the bank in which the money is deposited uses to buy a Treasury security, then it will not stimulate production and hence employment. Even if he uses it to buy something, it may turn out that the seller is selling from inventory and doesn’t plan to restock, in which event the effect on production will depend on what the seller does with the money he receives for the sale—maybe he will save it in some inert form!

 

Far from being effective as stimulus, the extension of unemployment benefits will have two negative effects on employment. First, it will increase the opportunity cost of the recipient’s rejoining the labor force. Unemployment benefits are set lower than earnings to reduce the moral hazard that Becker discusses, but the gap between benefits and earnings is narrowed by the costs of work (such as commuting, and any disutility associated with work, such as fatigue and boredom) and by the benefits of household production and of leisure—and those benefits, unlike earnings, are not taxed. The gap is so small for many unemployed people that studies show that they do not begin a serious job hunt until their unemployment benefits are about to expire.

 

So extending or otherwise enhancing unemployment benefits, far from stimulating employment, is likely to reduce employment and so slow the pace of economic recovery.

 

Second, extending unemployment benefits has a negative long-term effect on employment. The longer a person is unemployed, the less likely he is ever to return to the labor force, at least in a job comparable to the one he held before becoming unemployed. Apart from erosion of skills and of the habit of working, persons unemployed for a long time are unattractive hires because employers are suspicious of these persons’ attachment to or aptitude for work.

 

Thus the net effect of the just-enacted extension of unemployment benefits is likely to be to reduce employment and output. And while the amount of the benefits involved in the extension is not large, the negative effect on the economy may be if a substantial number of the 2.3 million persons who will be receiving the benefits are unemployed for a longer time, as a result, than they would otherwise be.

 

So the extension has to be defended if at all as a welfare measure. It is a bad measure because it is not means-tested. To be counted as unemployed you have to be looking for a job, so one can assume that the unemployed are involuntarily unemployed and so would prefer to work. But that doesn’t mean that they necessarily face economic hardship as a result of being unemployed. They may be unemployed because their attachment to the labor force is actually quite week; they do not try very hard to meet their employer’s expectations and so are quick to be laid off in bad times, or their search for employment is lackluster. They may have large savings or a high-income spouse. No doubt the bulk of the long-term unemployed are hardship cases, but it is only hardship cases that make a strong claim on a welfare program.

 

The fact that not all persons who have been unemployed for a substantial period of time are hardship cases reinforces my concern that extending unemployment benefits will cause disemployment. The persons who can afford, as it were, to be unemployed are likely to pocket any additional unemployment benefits that they receive and slow their search for a job.

Comments

[Tom Rekdal]

This is, of course, an entirely persuasive comment, which will have absolutely no impact upon public policy. Perhaps Posner and Becker will eventually address the interesting question of the relative influence of real economics and witch-doctors.

[Jim]

The President and his minions clearly do not know what they are doing and/or they don't care. Some even think that they are deliberately trying to wreck the economy ala Cloward-Piven. In any case, more unemployment benefits will simply delay the inevitable
public acceptance that the US standard of living will have to come down.

Growing up in a very middle class area in the 50's in a family of six children, my father's peak annual income was about $40,000. We did not live lavishly, sharing bedrooms, bathrooms and never traveling by air or frequenting restaurants. We youngsters worked from about age 10 to make our own spending money, mostly at menial jobs like shoveling snow, cutting grass, delivering newspapers or selling them at football games. When we did work at larger organizations, it was usually manual labor without union membership or benefits. Using $40,000 as the base and the CPI as the index, our life style would require my father to have made $325,000 annually today. Since the present power structure in Washington today considers a annual family income of $250,000 "rich" and woluld like to solve the politician's problems by taxing those people more and since there is only 1.5% of the population in that income category, it is more evidence that the living standard will be coming down and that American's who want to work will have to take low paying jobs. Otherwise the permanently unemployed will simply be a large group of on the dole voters for the nanny state, the "rich" will not sustain that (cannot), the feds will monetize the debt and we will wind upo looking like Venuzela.

As P. J. O'Rourke says, "Politics IS the problem".

[Joshua Norman]

I would personally paid back all my unemployment compensation if the following policies were implemented:
1. The U.S. deports all the illegal immigrants in the country back to their home countries.
2. The U.S. enforces the immigration laws al...ready on the books and removes the anchor baby loophole.
3. The U.S. reduces the number of legal immigrants permitted to enter the country as well as implements formal policies that focus immigration efforts on immigrants with the desired, education, skills & capital.
4. The U.S. implements tariffs on imports, particularly on imports from the Third World.
5. The U.S. dedicated the revenue raised by tariffs to cut taxes for individuals, businesses and U.S. corporate entities.

I'm not wedded to these ideas but like the progressives I insist that those oppose to them are duty bound to offer alternatives.

[Anthony Capezzali]

Another 2 know nothings commenting on a situation they've not experienced. They lose site of the fact that there are no worthwhile jobs to be had. Employers are taking tremendous advantage and offering nothing in return for great sacrifice on behalf of the potential employee.I'll match my credentials to either Gary and Richard and I've been out of work for close to 2 years. I've sent out hundreds of resumes and when I am asked to interview the employer offers a pittance and laughs behind my back. Stick to what you know rather than speculating on issues you know little about.

[Jim]

No onw begrudges the honestly unemployed their benefits but realize that it was your government which forced the jobs overseas by inflating the dollar and driving up labor costs so that companies margins were shrinking. If companies cannot make a decent ROI, there will be no jobs here or abroad.

[Joshua Norman]

@Anthony:

That was a good post. You said what people need to hear with regards to the lousy employment market out there.

I offered my compromise in the hope that it reduced the reserve army of unemployed. In the labor market, we have millions of educated professionals all chasing the same nickel.

Before we had increased immigration in this country, the blue collar jobs paid well and offered personal & career related growth. Now we have office jobs that are low-paid and dead end.

With regards to Anthony's comment about employers paying a pittance, they don't pay more than they have to and they won't ever do so. Let me also speak on behalf of American workers, they'll never get more than a pittance as long as businesses have an unlimited supply of cheap exploitable labor coupled with experienced professionals applying to staff level jobs.

[Joshua Norman]

@Jim:

My government? I never voted for these clowns. Plus I proposed ideas that would CUT business taxes & costs.

[MAV]

When was the last time Your Honor or your colleague looked for a job? I'm going to venture a guess and say maybe four or five decades ago when you joined UC?

I understand your faith in the intuitive conclusions that a simple S & D graph make you draw but in my experience (both seeking jobs and in hiring people for jobs) the real world is a lot messier.

Rather than speculating about the deleterious effects the non-hardship cases why don't you present some research that indicates that disemployment is a real world phenomenon rather than a figment of your imagination?

[Brian Davis, Austin, TX]

Jobs aren't growing because stock market investors are spooked by news or rumors that a company is in "expansion" mode. That translates to expanding costs and growth in liabilities. Market makers want to see revenue growth, top-line margin growth, profits growth on greater productivity, increases in cash, and shrinkage in debt. Those are the companies that get rewarded - and rightly so - with a higher stock price and a lower cost of bonds. The only excuse to grow U.S. workforce headcount is if you're at full capacity producing and selling to sweet spots in emerging markets, like Caterpillar's sales to China. So extending unemployment comp infinitely really is just throwing away taxpayer dollars.

[Dennis Tuchler]

2 thoughts: First, I agree that government support for the unemployed should be handled like welfare, and be means tested (where "means" includes any income and imputed income from owned real and personal property). Second, I wonder why unemployment compensation is a matter for the government. Why isn't there an unemployment insurance market, where policies are purchased by the workmen? The income from these policies, of course, would be included in "means" that are limits on government welfare largesse.

[J.Justice]

Becker and Posner are two overly privileged wealthy white men who probably have never had to worry about subsistence. While their arguments are persuasive, they fail to account for the series of events that precipitated the decision to extend unemployment benefits.

WE ARE IN A RECESSION! UNEMPLOYMENT RATES ARE AT A RECORD HIGH! THE JOBS YOU ALLUDE TO DO NOT EXIST. WHAT PLANET DO BOTH OF YOU LIVE ON? AND FOLKS WONDER WHY EMPATHY IS SO IMPORTANT? Reasoning without context and empathy is not reasoning.

[Acuvue]

Justice, that's probably an assumption that doesn't do them justice. These gentleman were not born rich white men (if they are), they've put in the work and definately earned their positions.

[MAV]

Can anybody identify any empirical evidence whatsoever to support Posner's assumption that means testing would clear the unemployment lines of the allegedly insincerely unemployed, siphoning off billions in unneeded benefits..

I mean if they exist in any meaningful number and it's a problem that needs fixing - wouldn't one be able to provide evidence that the problem exists prior to attempting to solve it?

[Brian Davis, Austin, TX]

I could find room to be sympathetic to means testing, but practically speaking I'm afraid it would swamp the claims administration process. States would have to staff up with means investigators and caseworkers like unemployment comp were worker's comp or Social Security disability or an IRS audit. Presently (in Texas) an applicant qualifies by having been laid off or forced to retire in a RIF. The only disqualifiers are voluntary quit, on-the-job misconduct, or AWOL from work. Even with lawyers on both sides it only takes a half hour to "try" the most contentious of unemployment comp cases before (telephonically) the ALJ.

[J.Justice]

@ Acuvue: I described them as the following:

(1) overly privileged, because it's easy to look down on the supposedly lazy unemployed when you ensconced within the ivory towers;

(2) wealthy, because they are both wealthy individuals;

(3) white, because they are as white and "waspy" as ever;

(4) men, because they are certainly male.

My conclusions are not based on whether they were born into money. But let's get one thing straight: To achieve wealth in our society, WORKING HARD is not enough. For example, the 25-year old Mexican-American mother of two who spends 50+ hrs cleaning offices at night works hard. But she ain't gonna get rich doin' just that.

[Pradeep K]

What I see is spoiled unemployed American people in the bottom 10-50% of the US wealth scale, who on a worldwide basis are still in the top 10% of wealth, whining because people in the top 10% of the US wealth scale, i.e. the top 2% on a worldwide basis, are not giving them money to support their spoiled western lifestyle. Meanwhile the services they want to provide in exchange for this spoiled western lifestyle are the same jobs that many of us in India and China are happy to do for 1/5th of the cost.

In other words, the top 10% of the wealthy (American low and middle class) are wining to the top 2% of the wealthy (top 10% of Americans) that they need help because the worldwide middle class of India and China are stealing their spoiled western standard of living. The epitome of hypocrisy.

How about, we, the Indians and Chinese are the recipients of this redistribution from the world’s wealthiest 2%. What will then the American low and middle class say? “Get your hands off our rich people, they are ours?”. People living in $80,000 homes driving two Toyota Corollas in one family, want themselves to be the recipients of taxes on their rich when many of us in the developing world are happy to assemble autos, computers and pretty much everything else for $300 a month have one Tata car per family and live 4 people in 400sqf. Shame on your hypocrisy.

But it is a good thing that you engage in this type of class warfare Americans! Because by blunting incentives to work throughout your society, you further compromise the competitiveness of your country and its economic growth rate, and so bring about the day when the 3 billion of us from the BRIC countries (Brazil Russia India China) finally bring you down. You are waging class warfare against your heroes; this is why you’re all going down.

[Kevin McGilly]

Always good to know that two fellows with 100% job security - a lifetime sinecure in Judge Posner's case, and tenure in Becker's -- are opposed to extending unemployment benefits for those without a job.

[NEH]

I have always harbored the thought that the "Emerging Economies" (India, China, and now Africa) operated on the "Plantation Business Model" with the "cat of nine" in the hands of the Overseer. We moved away from that less than enlightened business model back in 1865 with the issuance of the Emancipation Proclamation and the successful conclusion of the Civil War. Not too mention, the rise of Union organizing and the legal recognition of collective bargaining which created the Middle Class.

To be told that the U.S. is a failure and doomed to failure economically because we don't and won't embrace such an economic philosophy (the Plantation Economy) is quite disingenous. Perhaps now the Financial/Commercial/Industrial community and Congress will take notice and finally truly protect U.S. economic and domestic policy interests.

[Brian Davis, Austin, TX]

Pradeep K has a better handle on the future of payroll employment in the U.S. than 95% of Americans. Massive foreign investment in the U.S. is the only prospect for growing employment at a rate that'll replace the jobs lost during the current Depression with new jobs. But emerging economy investors aren't going to want to pay the U.S. labor compensation, taxes, and benefits we take for granted. It means all American workers will have to adjust to a lesser standard of living. Last I looked, the average monthly wage in China is still below $200 U.S., this after the raises recently granted to workers by Honda and the big electronics assembly firm that makes Apple's i-phones and HP and Dell computers.

[Jake]

Pradeep K has a point or two he would like to make. But he conveniently overlooks the fact that he would be posting in Japanese -- assuming, of course, that he were not spending his days in a labor camp, without WiFi access -- had not valiant Americans and their allies defeated the Empire of the Rising Sun 65 years ago.

America has paid its dues. That said, it is pathetic that America is now being run by, essentially, children who have no concept of our proud and well deserved heritage.

[Pradeep K]

Predeep actually loves America because the individualism that America is based on (perhaps WAS based, from what I read about today’s America) brought her such disproportionate prosperity that the rest of the world, including my country India, finally had no choice but to abandon its statist welfare economic model and liberalize its economy (at least in part), something that has brought us enormous prosperity relative to where we were even a mere 20 years ago.

As one previous commenter also put it, we, the 3 billion people of the BRIC countries need not reach the US in per capita productivity in order to eclipse it economically. If, every citizen in BRIC becomes just 1/3 as rich as the average American our economies will be bigger than the US and Europe combined.

In a nutshell, your liberalized economy has brought you tremendous wealth. But while we have finally instituted moderate steps to liberalize our economies (i.e. we are starting to copy you) your economic liberalization has stalled (may even be backtracking now, seems like).

So the way I see America’s future, you only have one choice. You either keep liberalizing your economy to the next level, or we catch up to you and you loose your privileged position in the world. Europe has already come to an almost complete stop and the BRIC train is coming at 5 times the speed (1.5% vs. 8% growth). Just China overtook France, then Germany, and now Japan in short order.

Right now the Average American is about 10 times wealthier than the average citizen of the world. So to those Americans that keep complaining, I have to say: You can either be the mid-low class citizens of a very wealthy country (and with what are ultimately good chances of upward mobility) or, at best, your redistribution schemes will make your children average citizens of a middle of the pack country. In relative worldwide terms, that is really a long way down from where you are now. Your children are going to be looking back to the good old days when their poorer parents were, in reality, sitting on the top of the worldwide prosperity pyramid.

I make about $1000/month writing software in Bangalore. But I do not hate Bill Gates, Larry Ellison and Steve Jobs. They are my heroes. Their work contributes to my upward mobility while you, in your economically suicidal mindset, hate them.

But, don’t get me wrong. In spite of what I said in my first message, I am actually not looking forward to America’s demise. And I’m acting out of self interest here. With the exception of America’s few past and present imperialist coercive military behaviours, loosing America as a beacon of individualism will hurt us and, in my view, all of humanity too.

[NEH]

The "Liberalization" of work, Labor Law and the return to a lower standard of living? How many Americans are willing to return to the slave quarters living at the whim and command of the "Massa" in the big house on the hill? All enforced by the sting of the lash. If one wants freedom, liberty, equality, democracy and republics there is an economic base to it all and that requires the franchising of those who work for a living.

Instead of the U.S. and the developed Nations trying to win the "race to the bottom", the developing world and emerging economies should be trying or forced into the position to win the "race to the top". Or in business parlance, "Fairtrade". And all of this will only come about by Union Organizing and Collective Bargaining throughout the World and utilizing other Domestic Policies such as, Unemployment Compensation.

[EdTV]

Looks like Huntington was right when he wrote about BRIC inhabitants going through a phase of self-affirmation ...

[Joshua Norman]

@ Jake:

I would have to agree with your post. People forget that the US pays 22% of the UN dues as well as contributes its troops to the UN for peacekeeping operations. People also forget that it is the US system of a constitutional republic with a strong democratic tradition that most countries are trying to emulate. People also forget the billions of dollars spent by US taxpayers on foreign aid to other countries.

The one thing that disappoints me about the good that America has done for the world is that the world thinks the following about America's good deeds:
More
Is
Never
Enough

[Joshua Norman]

@Brian:

After seeing your earlier posts opposed extending unemployment combined with your embrace of Pradeep's first post, considering that you are from Texas, the land that elected Jorge Wetback Bush twice as governor, I'm not surprised you embrace the idea that Americans should embrace a lower standard of living. Does this apply to corporate executives, i-bankers, traders and government workers too? The reason why America because the world's most admired country and a destination of choice for immigrants is because of its high living standards.