Sumner on UI

by Russ Roberts on December 4, 2011

in Work

Very thoughtful.

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{ 86 comments }

nailheadtom December 4, 2011 at 12:53 pm

You could make the case that UI is actually mortgage and car payment insurance. And you could also make the case that the unemployment benefits, which vary from state to state, constitute the real minimum wage in that state. No sane person is going to take an income cut to get off unemployment. UI is also a subsidy to the seasonal construction industry, keeping well-paid highway and heavy construction workers unemployed in the winter months and available to return to their jobs in the spring.

EG December 5, 2011 at 10:09 am

If it functioned like insurance, that may be the case.

Patriotic American December 4, 2011 at 1:43 pm

“The statistical evidence on UI is overwhelming significant. When the UI benefits maxed out at 26 weeks, there was a spike in the number re-employed right after the benefits ran out.”

The spike just shows people aren’t finding a job equal to or better than the job they lost in the time alloted, so they take the best available. This is not a problem unless you don’t think they don’t deserve their unemployment benefits from their unemployment INSURANCE.

Employers game the system (Microsoft is a well known example). Employers pay different rates depending on how much they game the system, in fact. If it was such a terrible deal for them they would find some other way to manage their workforce, QED. But what’s important is for Cafehayek to keep pushing the narrative that it’s never capital’s fault for anything, and always labors fault for everything.

Dan J December 4, 2011 at 1:47 pm

Everything? Nope.

Sam Grove December 4, 2011 at 1:53 pm

the narrative that it’s never capital’s fault for anything, and always labors fault for everything.

Is it your counter narrative that it’s never labor’s fault and always capital’s fault?

Patriotic American December 4, 2011 at 2:54 pm

No, I don’t have a narrative.

SmoledMan December 4, 2011 at 5:31 pm

Yes you do – “corporations are evil’.

Sam Grove December 4, 2011 at 7:03 pm

If you want credibility, you better start getting honest with yourself.

Chucklehead December 5, 2011 at 10:22 am

“the narrative that it’s never capital’s fault for anything, and always labors fault for everything.”
Patriotic American:
You haven’t been paying attention. Capital’s fault is the mal-invesment causing the bust. It is government’s fault for creating the moral hazard which induces the behavior, it is labour’s fault for pushing for programs that cause the moral hazard.

nailheadtom December 4, 2011 at 2:41 pm

Capital’s fault? (Whatever that means.) Labor’s fault? Doesn’t government enter the fault zone?

Patriotic American December 4, 2011 at 3:02 pm

“Doesn’t government enter the fault zone?”

No. There’s the portion of government that’s controlled/influenced by big business, and the portion that’s controlled/influenced by labor. The parts outside this discussion (like a lot of the military portion) aren’t a factor.

If you’re claiming there’s a government for governments sake faction (career bureaucrats?), they’re insignificant to this discussion, and I say insignificant overall. The vast portion of the apparatus of government is serving a constituency or men who want to wield the levers of power because they want wield the levers of power.

JoshINHB December 4, 2011 at 5:34 pm

So was it the capital influenced government or the labor influenced government that killed the Keystone Pipeline?

ralph December 5, 2011 at 9:11 am

Could it have been Obama counting green votes vs energy employees?

Methinks1776 December 4, 2011 at 2:58 pm

The world does not owe anyone a job, let alone one equal to or better than the one they lost.

SmoledMan December 4, 2011 at 5:31 pm

Didn’t you get the memo from Elizabeth Warren – those jobs belong to “the people”.

SheetWise December 4, 2011 at 11:53 pm

Well then … when we no longer need their services, they can take their job with them. Seems fair.

Chucklehead December 5, 2011 at 10:36 am

Jobs “belong” to the customer.

SheetWise December 5, 2011 at 11:57 pm

As long as they clean up afterwards..

Nuke Nemesis December 6, 2011 at 5:09 pm

Gotta keep up with those talking points.

In — Grover Norquist
Out – Koch brothers
In — Success comes from the people
Out — Self-made man
In — Fairness
Out — Success
In — Equality
Out — High rewards for high achievers

Jon Murphy December 4, 2011 at 3:01 pm

The world owes you nothing. It was here first.

Jon Murphy December 4, 2011 at 3:03 pm

Why does it have to by anyone’s fault? I think you misunderstand one of the basic items of economics: resources. Both capital and labor are economic resources. By saying they compete is wrong (and leads to the zero-sum fallacy). Capital and labor complement one another, no nothing is “capital’s fault” or “labor’s fault.”

Randy December 5, 2011 at 9:05 am

Well said.

vikingvista December 4, 2011 at 3:13 pm

“This is not a problem unless you don’t think they don’t deserve their unemployment benefits from their unemployment INSURANCE.”

Calling it “insurance” doesn’t mean that it isn’t a coerced taxpayer-subsidized welfare transfer payment scheme, managed in almost no way like an actual premium-funded risk-valued insurance program, and in huge deficits as such government welfare programs commonly are.

So no. Nobody “deserves” the stolen wealth of another. Not if you are an UI beneficiary. Not if you are a Social Security beneficiary.

So the issue isn’t “deserving”. The issue is merely whether or not is in their individual best interests to take it if it is offered.

BTW, what does it mean to blame “capital” for anything? Are screwdrivers sinister actors to you?

indianajim December 4, 2011 at 5:25 pm

How can “capital” be at fault for anything, ever??? You can blame my computer all you want for what I post here and it won’t change the fact that the responsibility for the words typed here are mine.

Next, you will tell me that you really meant capitalists, not “capital.” But then we can get into a meaningful discussion where I can agree with you that “crony capitalists” are complicit with politicians in some cases in defrauding and hence destroying wealth generally.

But you should pay more heed to the old sentiment: “If you don’t say what you mean, you can’t possibly mean what you say.”

vidyohs December 4, 2011 at 8:09 pm

Like +1.

Fred December 5, 2011 at 8:34 am

How can “capital” be at fault for anything, ever???

Capital is at fault for the same reason guns are at fault for murder, water is at fault for drowning, and spoons are at fault for obesity.

It is easier to blame inanimate objects than to take responsibility.

indianajim December 5, 2011 at 10:11 am

Amen Fred, I feel your pain.

GAAPrulesIFRSdrools December 4, 2011 at 11:41 pm

Oh Good Grief, the prose is so familiar, yet the name is different..

b December 5, 2011 at 7:43 pm

How does Microsoft game the system?

Greg Ransom December 4, 2011 at 1:54 pm

User Interface ?

steve December 4, 2011 at 4:50 pm

When capitalism is working best, it destroys jobs as well as creates them. The rate of turnover in jobs has drastically increased. People will be out of work more frequently than they were in the past. UI is a good way to make things work better so that people do not starve or totally deplete savings in transition. It could even help make people more willing to take the entrepreneurial risks discussed in the prior post.

European UI should be differentiated from US UI. In Europe, UI generally means 100% salary replacement and at least a year of coverage, often longer. In that kind of scenario, one would expect it to decrease employment. UI in the US is much different. It has been limited to 26 weeks, pays a maximum of 50% of wages and tops out at about 22k, if memory serves. It is a much different animal. I think that is why early studies looking at UI in Europe which showed an increase in unemployment of 2%-3% are generalizable to the US.

Steve

SmoledMan December 4, 2011 at 5:33 pm

The way the modern economy is evolving, all that will be left are high level expert engineering & science jobs(super experts only) and low-low-low-low-end service jobs like janitorial.

GAAPrulesIFRSdrools December 5, 2011 at 8:55 am

In that kind of scenario, one would expect it to decrease employment.

Now how is that? If you have a long period of benefits and a complete replacement of your prior income, your search selectivity will increase, as you have less opportunity cost.

EG December 5, 2011 at 10:14 am

“People will be out of work more frequently than they were in the past. UI is a good way to make things work better so that people do not starve or totally deplete savings in transition.”

That doesn’t follow your first 2 sentences. Indeed the rate of turnover is pretty high, which means that people typically find jobs easily and quickly. Certainly I’d argue that people find jobs quicker and easier today than they did in the past (today meaning the past 10 years or so, not counting the recession), especially as jobs become more knowledge based.

steve December 5, 2011 at 10:38 am

But you will be, unavoidably for the most part, out of work for significant periods of time. In a knowledge based economy that will also likely mean some periods of retraining. UI, as it functions in the US, is just enough to help people get through these transitions. I think we got it just about right.

Steve

EG December 5, 2011 at 11:34 am

There’s no doubt that we have it “more right” than the Europeans. But I think the transition periods between jobs are getting shorter, not longer. Typical turnover doesn’t occur between careers where you need an extensive period of “retraining”; ie you’re not likely to quit/leave/get laid off a job, got another degree, and then get another job. That’s an exception to the high turnover.

It most cases its instantaneous…you surf Monster while at work, looking for a better job, and when you get one, you quit your old job. Not just the nature of work has changed, but also the means of advertising yourself or recruiting.

sethstorm December 7, 2011 at 12:37 pm

I didnt know Monster allowed prostitution, since that is the type of work you’re advocating.

Nuke Nemesis December 6, 2011 at 5:11 pm

And most European countries would have to improve to have our unemployment rate.

Adam Smith December 4, 2011 at 5:31 pm

Today Oklahoma City firefighters, police, and emergency personnel make a convincing case for the superiority of private action over the goons who are allegedly public servants.
Also, Adam, the man who maintains this site is facing over 20 years for helping some NH kids get a video online of one of their classmates having his head slammed against a lunch table for “stealing” his own sister’s makeup bag.
http://www.copblock.org/10743/suspected-prostitute-discarded-actions-of-emergency-responders-questioned/

a_murricun December 4, 2011 at 8:48 pm

My problem with Sumner’s piece is that he fails to recognize what both left and right fail to recognize – namely that the whole UI system was conceived and developed under assumptions that don’t apply now, if they ever did. And both sides now argue about tweaks to “fix” the system, but carefully avoid examining the underlying assumptions. A recipe for failure, and job security for generations of economists, lawyers, lobbyists and other types with no “skin in the game”.

Andrew_M_Garland December 4, 2011 at 10:36 pm

The irony. Employers pay cash wages and incur employment costs which include healthcare, taxes, unemployment insurance, and employment related legal entanglements. The employer correctly sees these employment costs as part of the total cost of employing the worker.

Competition and productivity determine the total which can be spent on a worker, and employment costs determine the cash wage which can be offered. Greater expenses for unemployment insurance mean lowered wages. Companies are writing the checks for unemployment insurance, but workers are paying for that “insurance” through lower wages offered.

People with jobs are paying for the people who supposedly were fired without cause. If they realized that, there would not be much support for giving 99 weeks of compensation to the non-working. At 3-5% unemployment insurance, many workers are giving up ten days of paid vacation each year to support the unemployed.

EG December 5, 2011 at 10:17 am

Well that argument can be made for car insurance as well. Good drivers pay for bad drivers. But that’s not really a good argument. I realize that UI isn’t actually “insurance”.

GAAPrulesIFRSdrools December 5, 2011 at 10:52 am

Good drivers pay for bad drivers.

When you can identify “bad drivers”, i.e., multiple accidents, moving violations, etc., those people are “rated” up to be in a pool with others that present similar risks. Similarly, UI premiums are experience rated-meaning the more payments to former employees-the higher the “premium” paid by that business-assuming the business remains in existence.

Under most circumstances, the reason for your unemployment does not matter, unless you engage in “willful misconduct” and the employer bother follows the progressive discipline protocols and the makes their case in an administrative proceeding.

Dan J December 4, 2011 at 11:43 pm

Sorry but…….if there is to be UI, A lifetime unemployment benefit max should be implemented. The millions who have used 52- 99 weeks of the crutch should never be allowed to receive it again.

GAAPrulesIFRSdrools December 5, 2011 at 10:54 am

Will you then also suspend the requirement for premiums to be paid by future employers on their behalf?

SheetWise December 5, 2011 at 12:06 am

There government does not fundamentally understand the concept of insurance, and they’re giving it a bad name. They’ve used the word “insurance” to describe their programs for Social Security, unemployment, and now even health care — and none of these programs are implemented in a way that even resembles the services that real insurers provide. I wish they would simply call it what it is — welfare. Give it some stigma, and set it up so that it doesn’t kick in until you’ve exhausted whatever personal resources you have.

GAAPrulesIFRSdrools December 5, 2011 at 10:55 am

UI is far from normal insurance, but the other programs you cite are far more malnamed as insurance.

SheetWise December 6, 2011 at 12:01 am

They will all evolve into their imperfect form if protected or sponsored by the state.

GiT December 5, 2011 at 3:03 am

Seems like good reason to just scrap UI and replace it with a basic guaranteed income or negative income tax.

Slappy McFee December 5, 2011 at 9:10 am

This is an idea I’ve been attempting to trumpet for a while now. Programs like Social Security and Medicare would be better off under this system also.

Randy December 5, 2011 at 9:45 am

Agreed. Though I wouldn’t make it an absolute guarantee.

Fred December 5, 2011 at 9:13 am

From each according to ability; to each according to need.

What could possibly go wrong?

GiT December 5, 2011 at 11:42 pm

I don’t know, maybe you could query Friedman or Hayek’s works, both of whom supported the idea.

Jon Murphy December 5, 2011 at 9:23 am

Or, and hear me out on this, instead of punishing saving as we currently do, why don’t we remove those barriers. Then each would person would be able to create his own safety net and the desire for government will be reduced

Chucklehead December 5, 2011 at 10:26 am

That would require politicians give up control. If they don’t control it, how can they use it to buy votes?

Slappy McFee December 5, 2011 at 10:59 am

Yes, not punishing savers would be a giant leap in the right direction.
But, the perceived need for a social safety net by busy bodies will not be going away any time soon. By removing the program portion of wealth redistribution, and applying it thru a negative income tax, it would remove much power from government bureaucrats. Its much more difficult for government defenders to defend the unseen than it is to defend the seen.

GAAPrulesIFRSdrools December 5, 2011 at 11:20 am

Seems like good reason to just scrap UI and replace it with a basic guaranteed income or negative income tax.

We have a partial negative income tax-EITC.

I heard this argument as an econ undergrad nearly three decades ago, that it would be better to replace the benefits-in-kind welfare systems (food stamps, subsidized housing, etc) because it would be cheaper to provide the same economic satisfaction with cash, since it could allow them to obtain whatever they wanted.

That’s a matter of worrying about the tree to the exclusion of the forest, since I’m not interested in maximizing the recipent’s satisfaction (and breeding dependency) when they aren’t providing anything in exchange except votes to the first politician that offers to put more candy in their goody bag.

GAAPrulesIFRSdrools December 5, 2011 at 11:22 am

By the way, if you want a perfect example of Newspeak, just think about the “Eatned Income Tax Credit”. Its not a tax credit, its transfer-based not on earned income-but the lack of earned income.

GiT December 5, 2011 at 11:40 pm

Um, it’s called the earned income tax credit because it is only applicable to those who actually do earn income – it does not apply to those who are unemployed.. It differs from a NIT because an NIT transfers money regardless of whether or not one also earns an income. So I don’t really see how this is newspeak.

Randy December 5, 2011 at 9:30 am

It occurs to me that we spend too much time worrying about how politicians spend their revenue. Its really none of our business. The thing to do is to draw a firm line as to how much we allow them to take, and then just leave all the prioritizing to them. Is extending unemployment benefits a good thing? Well, if doing so comes out of the politicians own pockets, why not?

EG December 5, 2011 at 10:20 am

That implies that politicians have the right to our money. We pay them to provide some service which we can’t provide otherwise. Not to say that “we” are doing a good job at that, but clearly we care what they spend our money on.

Randy December 5, 2011 at 10:56 am

I wouldn’t say it means they have a “right” to it. It just means that their taking it is a fact (based on historical evidence). My thought is that it may be counter-productive to imagine that just because they take money from us that we are somehow part of the decision process, and that it may be better to just focus on one issue, how much they take, and forget all the rest. That would put the burden of prioritizing where it belongs – on them.

EG December 5, 2011 at 12:46 pm

Yes I understand your point. But the reason we pay taxes to begin with, is to get a particular service in return. Not just any service, and not in any amount. A particular service in a particular amount. What that service ought to be, is constrained by the constitutions of the federal, state and local governments. So you’re right…its not us. And it doesn’t have to be us. Its the contract.

The problem, is that we have abandoned any pretense of following constitutional limits. So now the money can, and is, spend on anything.

Slappy McFee December 5, 2011 at 11:08 am

Its always the seen vs unseen argument. If I don’t allow politicians to subsidize a new Vikings stadium, then they can’t stand in front of it and tell me how wonderful they are for building it. If government defenders can’t show all the wonderful things they are spending our money on, they have a harder time taking it.

GAAPrulesIFRSdrools December 5, 2011 at 11:23 am

“their revenue. Its really none of our business”

That’s a joke, right?

Randy December 5, 2011 at 12:20 pm

Not joking at all. I don’t think of the political organization as “us” doing things that “we” want to do. I think of it as “them” doing things that “they” want to do with money they took from us. They tax us because they can, not because we asked them to. How much we let them take is (maybe) our business, but what they do with it after they take it is not. Or, by way of example, I don’t care what the owners of Walmart do with the money after I pay them, so why should I care what the political corporation does with the money after they take it? And, like I said above, I do see an advantage in this focus.

Chucklehead December 5, 2011 at 10:28 am

“My guess is that around 1 out of every 100 Americans are current unemployed due to extended UI and higher minimum wage rates. Casey Mulligan seems to think it’s 2 or 3 out of 100.”
My guess it is more like 10 to 20%. Are there any reliable figures out there?

Jon Murphy December 5, 2011 at 12:22 pm

Of course not. That’s something impossible to measure.

Henri Hein December 5, 2011 at 1:46 pm

There are 13 million Americans that are technically unemployed (BLS 12/2/2011). So that is a mathematical impossibility.

Chuclehead December 5, 2011 at 7:19 pm

In reality they are off by at least a factor of two. If there were no unemployment insurance and no minimum wage, employment would be higher and prices lower.

sethstorm December 5, 2011 at 4:01 pm

Pay more to outcompete UI, treat people with more respect in the workplace, and make work arrangements more secure/extremely long-term.

Even if it takes extreme amounts of legislative force.

SmoledMan December 5, 2011 at 4:28 pm

You can’t legislate respect.

Jon Murphy December 5, 2011 at 4:31 pm

What does “Extreme amounts of legislative force” mean? Does that mean what I think it means?

Randy December 5, 2011 at 4:57 pm

I suspect that what sethstorm has in mind are highly regulated employers and highly paid and benefitted employees. In the real world, such “extreme amounts of legislative force” have always resulted in employers who are defacto political appointees and employees who are effectively enslaved.

Jon Murphy December 5, 2011 at 4:59 pm

Right. I mean, if you are going for the Japanese model, where it is effectively impossible to fire anyone (or to leave a job), then it is nothing more than indentured servitude.

sethstorm December 5, 2011 at 11:24 pm

Yet the model you’d want is not much more than prostitution, where indentured servitude is closer to reality than one would admit. The staffing agency and its client act only to protect each other(much like a pimp and a john respectively) against the worker(the prostitute). It’s like you’re trying to argue that 22 grams of chocolate is more than 24 grams of chocolate.

The model I’m suggesting is one that considers the worker as a well-treated, well-respect, long-term investment instead of someone that is strung along decades of “short-term flings”. The US had it right in the 20th century and the Japanese had it mostly right after WWII(in their home country). Once Europe embraced the siren song of staffing agencies, they got it completely wrong, as will any country that goes down that path of perdition.

Randy December 6, 2011 at 9:05 am

sethstorm,

I’m curious as to where you get such an impression of what working for a living is all about (e.g., working is akin to prostitution or indentured servitude)? I’m thinking that either you’ve had some sort of really bad work experience… or no work experience at all. I’m guessing the latter. You sound like an average to below average student with a very well developed sense of entitlement and/or a wannabe politician to me.

Jon Murphy December 6, 2011 at 9:08 am

What, exactly, are you proposing?

sethstorm December 7, 2011 at 12:27 am

Randy:
The opposite. I’ve managed to know some large businesses that have treated their workers well, in spite of the consensus that they don’t. Worked for one of them, lived in the shadow of another, with two of the Big Three (GM/Chrysler) once having a deep presence not far away.

Working isn’t a form of prostitution, the indirectly hired labor model is. Staffing agencies, consultancy, and such fall under the idea of prostitution versus investment.

Jon Murphy:
The restoration of a labor model that has worked well for the US, when similar skill complaints have been observed – train from the ground up. It is the model that views the worker as an investment to be treated well over the long term – not opposed or have middlemen placed in between them and the ultimate entity that wants the work done.

sethstorm December 7, 2011 at 12:43 am

To clarify before someone tries to twist my words:

The first two entities I referred to in:

“Worked for one of them, lived in the shadow of another, with two of the Big Three (GM/Chrysler) once having a deep presence not far away”

I did not work for either of the automakers, they were two of the few large employers in that era. My experience was with a large, privately held business that focuses on media and telecommunications – having a presence all over the South, East Coast, and Midwest.

g-dub December 5, 2011 at 5:58 pm

I suspect that what sethstorm has in mind are highly regulated employers and highly paid and benefitted employees.

That is more or less what I refer to as “back door socialism.” They don’t do it overtly. “Progressives” often claim to not be socialists. Back dooring provides the cover. With a zillion regulations controlling industry, it is hard to put one’s finger on the a dominant cause of broader systemic malaise (hey, because “dominant cause” makes for nice models). It is death by a thousand little cuts. It is indirect socialism.

Jack Fraser December 5, 2011 at 6:49 pm

It means a Judge Dredd quote-a-thon!

Jon Murphy December 6, 2011 at 9:09 am

“It means a Judge Dredd quote-a-thon!”

The comic or the movie? ‘Cause the movie was heinous (but quotable).

Chuclehead December 5, 2011 at 7:22 pm

So do not hire anyone until you can pay their income for life and they can do whatever they feel like once hired. Good plan. You must be heavily invested in robotics.

Junkyard_hawg1985 December 5, 2011 at 4:45 pm

A couple of more cases from personal experience:

1) One Summer when in college, I worked full time with an unemployed person. He was getting his unemployment check plus his paycheck, I only got the paycheck.

2) Had an unemployed uncle through marriage that was unemployed for an extended time while his wife worked full time. He built a house while he was unemployed.

SheetWise December 6, 2011 at 12:12 am

I think it will take a hammer and chisel to convince some people that there are levels of marginal taxation that influence human action — in the meantime, we the hammer and sickle.

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