Unemployment Benefits: When More Is Not Always Better

By: José Azel - Apr 25, 2014, 1:05 pm

EspañolThe latest proposal to extend federal unemployment benefits again — up to a maximum of 77 weeks — begs the question: is more always better? In the social sciences the notion that more is not always better is known as the Inverted “U” hypothesis.

Inverted-U curves have three parts: (1) the left or ascending side, where more resources make things better, (2) the middle of the Inverted-U, where more resources do not make much of a difference, (3) and the descending right side, where more resources make things worse. The logic of the Inverted-U curve is that there comes a point when, notwithstanding the intentions, adding resources only functions to make things worse. Scientists argue that nearly all experiences follow an Inverted-U.

Inverted U Curve
Inverted-U curve.

Let’s apply this insight to the unemployment benefits debate.

The federal-state unemployment insurance system was established in 1935 to serve as a safety net, providing temporary financial assistance to workers who lose their jobs. Initially, unemployment compensation benefits were to be funded by payroll taxes on employers. However, the system has evolved to using general federal revenues to pay for an expanded range of benefits. At first, benefits were to last 16 weeks, but were later expanded to 26 weeks, and over the years “supplemental” benefits have been added to the proposed span of 77 weeks and counting.

Protecting workers from the vicissitudes of fortune may appear a noble idea, but there are unintended consequences. The first consideration should be whether shielding us from the vicissitudes of fortune is a legitimate function of government, but let us put that philosophical question aside for another day to focus now on unemployment insurance.

Research shows unambiguously that unemployment insurance encourages individuals to remain unemployed longer by providing an incentive and the means to not work. To be clear, this is not a disparaging assessment. It is a factual statement of a logical human reaction to a particular stimulus.

One reason is that unemployment benefits increase what economists label as a worker’s “reservation wage.” This reservation wage is the minimum wage someone insists on getting before accepting a job, and it takes into account the difference between the government benefits and the amount that would be paid by an employer. As a result of receiving unemployment compensation, workers may decline job opportunities when the job does not provide a significant increase in monies received.

Other studies show that some workers may stay out of the job market to maximize the benefits received. This genre of research typically shows a sharp increase in re-employment just before unemployment benefits run out.

Do you see an inverted-U relationship here?

Proponents of extended unemployment payments argue that these payments serve to stimulate the economy by providing purchasing power to the unemployed. They forget to mention that in order to make these payments, the government must take resources away from employed workers via taxation, thus reducing the purchasing power of the employed. In aggregate economic analysis the income effect of such transfer payments is always zero. Alternatively government may borrow to make the payments, but that only shifts the loss of purchasing power to future workers.

Even more egregious is the argument that unemployment compensation payments offer a multiplier effect such that for every dollar paid the economy is stimulated by a greater amount, say $1.80, as the money travels from one recipient to another. If this were true, we could double our Gross Domestic Product by all stopping work and receiving unemployment compensation — unmitigated nonsense.

Even so, if as a society, we are persuaded that it is desirable to orchestrate a safety net for workers, there are far better approaches. One example is the program enacted in Chile. The Chilean system centers on personal unemployment-insurance accounts. These personal accounts are funded by an employer payroll contribution just as ours are; the difference is that the accounts are owned by the individual worker and accumulate balances over the worker’s career. Unused funds are the property of the worker and can be used to complement retirement savings.

Notice that these personal unemployment insurance accounts remove the disincentives inherent in our system since workers are motivated to find new employment as quickly as possible to preserve their account balances. At a minimum, it is a system that stops making things worse and moves resources from the descending to the ascending side of the Inverted-U curve.

José Azel José Azel

Senior scholar at the Institute for Cuban and Cuban-American Studies at the University of Miami. Azel was a political exile from Cuba at the age of 13 in 1961 and is the author of Mañana in Cuba. Follow @JoseAzel.

Venezuela: Amid Crisis, CEDICE Celebrates 30 Years of Fight for Freedom

By: María Gabriela Díaz - Apr 25, 2014, 11:22 am

EspañolAs economic and political chaos overwhelms Venezuela, the Center for the Dissemination of Economic Knowledge (CEDICE Libertad) — a Caracas-based, libertarian policy institute — is forging ahead and celebrating its 30th anniversary with a major conference. From April 24 to 25, the topic up for examination is "Latin America: liberty is the future," and attendees are debating the role of ideas towards social, political, and economic transformation. At the Chacao Cultural Center in Caracas with 500-530 attendees, the high-profile presenters include Nobel Laureate Mario Vargas Llosa (Peru); former-Representative and leader of the the Venezuelan political opposition María Corina Machado (pictured); Director of the Cato Institute's Center for Global Liberty and Prosperity Ian Vasquez (United States); Executive Director of the Foundation for Progress Axel Kaiser (Chile), and University of Francisco Marroquín Professor and PanAm Post Columnist Carlos Sabino (Guatemala), among others. The event has the sole purpose of discussing ideas and solutions to generate wealth, based on free enterprise and individual choice, as the only means to fight poverty — in sharp contrast to the nation's leaders, who have resorted to the opposite. According to the 2013 Forbes Best Countries for Business Index, Venezuela ranked 140th out of 145 countries, and 175th out of 178 in the Heritage Foundation 2014 Index of Economic Freedom. Being in Chacao — the center stage for the latest street protests — CEDICE was able to count on a strong police presence that protected the advancement of the event. No presence of government-affiliated paramilitaries (colectivos) has been observed, only a man with an ironic placard that read "CEDICE and Vargas Llosa: collaborators with the government." Regarding the latest student protests that have shaken the country during the past two months, Vargas Llosa made strong remarks. "They [the student protesters] are the true heirs of the leaders of independence," the Nobel Laureate asserted, and he assured that he didn't come to Venezuela to create conflict, rather to show support for the peaceful demonstrations. The Peruvian writer commented, "it's saddening that Latin America's richest country has such a high inflation. Venezuela has taken on a political and economic failure; the country is imitating Cuba." Vargas Llosa also spoke about Venezuela's constant infringement on human rights and what the "risky" threat of state indoctrination through text books can imply for the future of freedom in Venezuelan society. Venezuelan economist and director of Ecoanalitica Asdrubal Oliveiros participated in CEDICE's anniversary and condemned the regime's economic policies, describing Venezuelan state as "totalitarian," arguing that the Chavista model "is not related to the generation of welfare, but rather to its maintenance in power." Oliveiros explained the danger that Venezuela's current inflation rates pose to the most vulnerable groups, and criticized its subsidy policies, which, according to him, instead of benefiting the poorest, have been achieving quite the opposite. "We have a socialism that gives away fuel to the richest," he said, "but increases the price of transportation fares to the poorest.… Venezuelan society is drunk with subsidies." Joseph Humire, executive director of the Center for a Secure Free Society, addressed the topic of insecurity, and its importance in the debate of economic freedom. "We can't leave out the topic of insecurity," he explained, "otherwise, we would be giving complete control to the government." According to Humire, there are reports that show the relation between restraints on economic freedom and citizen insecurity: "While economic freedom levels decrease, homicide rates increase." The PanAm Post also had the opportunity to speak with Giannina Raffo, social media coordinator and executive assistant of CEDICE, about what this event means for the organization's trajectory, and the fight for freedom in Venezuela. "The battle is not only on the streets, it's with ideas as well. If we lose our focus on the ideas we defend, we lose everything," Raffo asserts. Despite the latest political events, Raffo remains optimistic. "We are close to losing our liberty, but we still have a chance to recover it.… That is why events like this one are so important." CEDICE may be turning 30 this year, but it hasn't been easy for a libertarian think-tank to survive under a socialist regime. "During the last 15 years, the organization has had to face the most difficult times," Raffo explains. "Nonetheless, a crisis like this ones has actually made us stronger, we have become more proactive with our mission." With Venezuela's political and economic context, she says, CEDICE has its goal clearer than ever: "We want to inform and warn that socialism is not the way to grow or develop. Our mission is to educate about the ideas of liberty, and rescue the minds of the young, who are forced to believe that they can grow under a regime where there's no freedom."

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