Are unemployed receiving too sweet a deal? -- Not this time

This article appeared in the Patriot News, Aug. 3, 2010.

When Tom Corbett, the Republican candidate for governor, suggested that extending unemployment benefits would discourage unemployed workers from looking for work — “people are just going to sit there” — he was roundly attacked for disparaging the work ethic of Pennsylvania workers.

Eventually, perhaps realizing that some of those people “sitting there” might briefly cast off their lethargy in November to go to the polling booth, Corbett conceded that he “misspoke” and that he knew that most unemployed people really wanted to work.

But Corbett is not alone in noting the adverse incentive effects of unemployment benefits.

Most economists would agree that the more generous the unemployment benefits are, the more likely it is that workers will hold out for a better-paying job.

In economics, there is something called the “reservation wage.” It refers to the minimum wage an individual is willing to accept. People’s reservation wages are likely to be higher when unemployment benefits are more generous because they have a good fall back.

This argument generally holds true during periods of economic expansion, when output is rising and firms are adding workers to the payroll.

Under such circumstances, workers are more likely to collect their unemployment benefits and “sit there,” knowing that they would in all likelihood find a job without too much difficulty when the benefits expire.

But when the economy is still reeling from a severe recession, unemployment is at 9.5 percent and firms are reluctant to hire workers, an unemployed worker would have to be a risk-taker (along the lines of a gambler in Las Vegas) to sit by insouciantly collecting his benefits, unconcerned about the time when his government checks will stop coming.

And stop coming they will.

True, the president recently signed into law legislation extending unemployment benefits through November.

But the path was arduous, especially in the Senate where Republicans decried the $34 billion cost of the measure while Democrats focused on the succor the bill would provide to about 2.5 million long-term unemployed who had stopped receiving payments since the end of May.

An unemployed worker, seeing the battles being waged in Washington (and also in his or her state capital), would hardly be looking with any degree of equanimity at the prospect of receiving continued unemployment benefits after the current program expires.

In the meantime, the labor market remains sluggish, as firms, still uncertain about the vigor of the economic recovery, remain reluctant to hire workers.

Small businesses are finding it difficult to obtain loans from banks, further crimping the nascent recovery — and delaying prospects for significant increases in hiring.

There is another argument for providing unemployment benefits.

Recipients of these benefits are likely to spend a large proportion of their checks on sundry goods and services (food, clothes, rent), which in turn props up consumer spending, the dominant component of the economy’s gross domestic product.

Any cut in benefits at this juncture will not only consign millions of unemployed people to continued hardship, but through the removal of an “automatic stabilizer” in the economy, also threaten a recovery in consumer spending and any sustained rise in economic activity in the private sector.

When the economy is back on sound footing, Corbett might wish to resuscitate his arguments against the unemployment benefits program.

An excessively generous social insurance program blunts the incentive to work while also widening the budget deficit — consequences that are of greater concern in a booming economy than in present circumstances.

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