Category Archives: Unemployment

Ignoring the adverse effects of the minimum wage may cost taxpayers billions

Today the Obama administration issued a statement calling for a ‘First Job’ funding initiative to connect young Americans with jobs.

The statement laments how difficult it is for young people to find employment and emphasizes how important a first jobs is for future career success:

“After the worst economic crisis of our lifetimes, the United States is in the midst of the longest streak of private-sector job growth in our history, with more than 14 million new jobs created during the past 70 months. But for too many young people, getting a first job—a crucial step in starting their career—is challenging.

When a young person struggles to get their first job, it can have a lasting negative impact on her lifetime income as well as her motivation, pride, and self-esteem.”  

I brought up this same issue 3 months ago in a previous blog post that highlighted the differences in teenage unemployment across cities. And unsurprisingly there are substantial differences – in 2012 teenage unemployment was over 45% in Atlanta and only about 26% in Houston.

So what’s the proposal? A $5.5 BILLION grab bag of grants, skills investment, and direct wage payments to put young people to work. Naturally, the most obvious solution to the teenage unemployment problem is never mentioned – eliminating the minimum wage. In fact, nowhere is it hinted at that the minimum wage may be contributing to teenage unemployment, despite several recent studies affirming this theory.

From a 2013 study:

“Thus, for older workers, the two effects offset one another, and there is little impact on their long-term employment rate. For teenagers, the extra reduction in hiring implies that their employment rates decline. The results are very similar for males and females.”

From a 2015 study:

Using three separate state panels of administrative employment data, we find that the minimum wage reduces job growth over a period of several years”

From a 2015 study:

We find that a higher minimum wage level is associated with higher earnings, lower employment and reduced worker turnover for those in the 14–18 age group. “ (My bold)

From a 2015 study:

I apply the estimator to estimate the impact of the minimum wage on the employment rate of teenagers. I estimate an elasticity of -0.10 and reject the null hypothesis that there is no effect.”

This glaring omission is unconscionable in light of the abundant evidence that the minimum wage harms the least skilled, least experienced workers, which includes teenagers.

As a Prof. David Neumark stated in a recent WSJ op-ed:

“…let’s not pretend that a higher minimum wage doesn’t come with costs, and let’s not ignore that some of the low-skill workers the policy is intended to help will bear some of these costs.”

An all too common occurrence in US policy is that government intervention causes a problem that the government then tries to solve with additional intervention, completely ignoring the possibility that the initial intervention was the source of the problem. In this case, price controls at the bottom of the labor-market ladder have prevented young people from getting on the first rung, so now the government wants to wheel over a $5.5 billion dollar stool to give them a boost.

While this series of imprudent events is not surprising, it’s still frustrating.

Berkeley, CA and the $15 – oops – $19 living wage

Berkeley, CA’s labor commission – in what should be an unsurprising move at this point in Berkeley’s history – has proposed raising the city’s minimum wage to an astounding $19 per hour by 2020! The labor commission’s argument in a nutshell is that Berkeley is an expensive place to live so worker’s need more money. And while Berkeley may be an expensive place to live, mandating that employers pay a certain wage doesn’t necessarily mean that the workers will get that money. As one Berkeley restaurant owner noted:

“We can raise our prices. But you can’t charge $25 for a sandwich,” said Dorothee Mitrani, who owns La Note. “A lot of mom-and-pop delis and cafes may disappear.”

The article states that Ms. Mitrani’s

…. full-service restaurant now subsidizes her take-out shop, which she said is running in the red as a result of the increases already in place. If the minimum rose to $19, she expects she would have to shut it down.

Of course, there are some politicians – and unfortunately some economists – who insist that raising the minimum wage doesn’t have adverse effects on employment, despite sound theoretical reasoning and empirical evidence to the contrary. My Mercatus center colleague Don Boudreaux has compiled an extensive collection of blog posts at Café Hayek debunking and refuting every pro-minimum wage argument out there, and I encourage interested readers to check them out.

The minimum wage most adversely effects low-skill, inexperienced workers, such as those without a high school degree, below the poverty level, between the ages of 16 – 19, and with some type of disability. So how do the people who fit into those categories currently fare in Berkeley’s labor market?

The table below shows the labor force rate and percentage employed for people 16 and over in each of those categories in the city of Berkeley in 2013 and 2014. The data is from the ACS 1-year survey. (American FactFinder table S2301)

berkely min wage employment 2013-14

As the table shows the labor force rate and the employment rate for each of those categories is already low compared to the overall labor force rate in Berkeley of 67% and employment rate of 62%. From 2013 to 2014 both the labor force rate and the employment rate declined for people without a high school degree, while the employment rate increased in the other categories. Nothing in this table leads me to believe that it would be a good idea to make the workers in these categories more expensive to hire, as it seems it is already difficult for them to find employment and it’s getting more difficult for some.

The table below compares Berkeley to the surrounding San Francisco MSA using only 2014 data.

berkeley min wage emp vs SF MSA

This table reveals that compared to the surrounding area, workers in these categories fare worse in Berkeley. The percentage of people with less than a high school degree who are employed was 11 percentage points lower in Berkeley, while the percentage with a disability was 0.8 points lower and the percentage below the poverty level was 1.5 points lower. Out of the four categories only 16 – 19 year olds had a better chance of being employed in Berkeley than in the surrounding MSA.

Hopefully Berkeley’s city council reviews the labor market reality in their city and thinks about actual consequences vs. intentions before deciding to increase the price that low-skill workers are allowed to charge for their labor. It’s already difficult for low-skill, inexperienced workers to find a job in Berkeley and making it harder won’t help them.

Puerto Rico’s labor market woes

Puerto Rico – a U.S. territory – has $72 billion dollars in outstanding debt, which is dangerously high in a country with a Gross Domestic Product (GDP) of only $103.1 billion. The Puerto Rican government failed to pay creditors in August and this was viewed as a default by the credit rating agency Moody’s, which had already downgraded Puerto Rico’s bonds to junk status earlier this year. The Obama administration has proposed allowing Puerto Rico to declare bankruptcy, which would allow it to negotiate with creditors and eliminate some of its debt. Currently only municipalities – not states or territories – are allowed to declare bankruptcy under U.S. law. Several former Obama administration officials have come out in favor of the plan, including former Budget Director Peter Orszag and former Director of the National Economic Council Larry Summers. Others are warning that bankruptcy is not a cure-all and that more structural reforms need to take place. Many of these pundits have pointed out that Puerto Rico’s labor market is a mess and that people are leaving the country in droves. Since 2010 over 200,000 people have migrated from Puerto Rico, decreasing its population to just over 3.5 million. This steady loss of the tax base has increased the debt burden on those remaining and has made it harder for Puerto Rico to get out of debt.

To get a sense of Puerto Rico’s situation, the figure below shows the poverty rate of Puerto Rico along with that of three US states that will be used throughout this post as a means of comparison: California (wealthy state), Ohio (medium-wealth state), and Mississippi (low-wealth state). All the data are 1-year ACS data from American FactFinder.

puerto rico poverty

The poverty rate in Puerto Rico is very high compared to these states. Mississippi’s poverty rate is high by US standards and was approximately 22% in 2014, but Puerto Rico’s dwarfed it at over 45%. Assisting Puerto Rico with their immediate debt problem will do little to fix this issue.

A government requires taxes in order to provide services, and taxes are primarily collected from people who work in the regular economy via income taxes. A small labor force with relatively few employed workers makes it difficult for a county to raises taxes to provide services and pay off debt. Puerto Rico has a very low labor force participation (LFP) rate relative to mainland US states and a very low employment rate. The graphs below plot Puerto Rico’s LFP rate and employment rate along with the rates of California, Mississippi, and Ohio.

puerto rico labor force

puerto rico employ rate

As shown in the figures, Puerto Rico’s employment rate and LFP rate are far below the rates of the US states including one of the poorest states, Mississippi. In 2014 less than 45% of Puerto Rico’s 16 and over population was in the labor force and only about 35% of the 16 and over population was employed. In Mississippi the LFP rate was 58% while the employment rate was 52%. Additionally, the employment rate fell in Puerto Rico from 2010-14 while it rose in each of the other three states. So at a time when the labor market was improving on the mainland things were getting worse in Puerto Rico.

An educated labor force is an important input in the production process and it is especially important for generating innovation and entrepreneurship. The figure below shows the percent of people 25 and over in each area that have a bachelor’s degree or higher.

puerto rico gt 24 education attain

Puerto Rico has a relatively educated labor force compared to Mississippi, though it trails Ohio and California. The percentage also increased over this time period, though it appears to have stabilized after 2012 while continuing to grow in the other states.

Puerto Rico has nice beaches and weather, so a high percentage of educated people over the age of 25 may simply be due to a high percentage of educated retirees residing in Puerto Rico to take advantage of its geographic amenities. The next figure shows the percentage of 25 to 44 year olds with a bachelor’s degree or higher. I examined this age group to see if the somewhat surprising percentage of people with a bachelor’s degree or higher in Puerto Rico is being driven by educated older workers and retirees who are less likely to help reinvigorate the Puerto Rican economy going forward.

puerto rico 25to44 educ attain

As shown in the graph, Puerto Rico actually fares better when looking at the 25 – 44 age group, especially from 2010-12. In 2012 Puerto Rico had a higher percentage of educated people in this age group than Ohio.

Since then, however, Puerto Rico’s percentage declined slightly while Ohio’s rose, along with Mississippi’s and California’s. The decline in Puerto Rico was driven by a decline in the percentage of people 35 to 44 with a bachelor’s or higher as shown in the next figure below.

puerto rico 35to44 educ attain

The percentage of 35 to 44 year olds with a bachelor’s or advanced degree fell from 32% in 2012 to 29.4% in 2014 while it rose in the other three states. This is evidence that educated people in their prime earning years left the territory during this period, most likely to work in the US where there are more opportunities and wages are higher. This “bright flight” is a bad sign for Puerto Rico’s economy.

One of the reforms that many believe will help Puerto Rico is an exemption from compliance with federal minimum wage laws. Workers in Puerto Rico are far less productive than in the US, and thus a $7.25 minimum wage has a large effect on employment. Businesses cannot afford to pay low-skill workers in Puerto Rico such a high wage because the workers simply do not produce enough value to justify it. The graph below shows the median individual yearly income in each area divided by the full time federal minimum wage income of $15,080.

puerto rico min wage ratio

As shown in the graph, Puerto Rico’s ratio was the highest by a substantial amount. The yearly income from earning the minimum wage was about 80% of the yearly median income in Puerto Rico over this period, while it was only about 40% in Mississippi and less in Ohio and California. By this measure, California’s minimum wage would need to be $23.82 – which is equal to $49,546 per year – to equal the ratio in Puerto Rico. California’s actual minimum wage is $9 and it’s scheduled to increase to $10 in 2016. I don’t think there’s a single economist who would argue that more than doubling the minimum wage in California would have no effect on employment.

The preceding figures do not paint a rosy picture of Puerto Rico: Its poverty rate is high and trending up, less than half of the people over 16 are in the labor force and only about a third are actually employed, educated people appear to be leaving the country, and the minimum wage is a severe hindrance on hiring. Any effort by the federal government to help Puerto Rico needs to take these problems into account. Ultimately the Puerto Rican government needs to be enabled and encouraged to institute reforms that will help grow Puerto Rico’s economy. Without fundamental reforms that increase economic opportunity in Puerto Rico people will continue to leave, further weakening the commonwealth’s economy and making additional defaults more likely.

 

 

Teenage unemployment in cities

New research that examines New York’s Summer Youth Employment Program (SYEP) finds that participation in the program positively impacts student academic outcomes. As the authors state in the introduction, youth employment has many benefits:

“Prior research suggests that adolescent employment improves net worth and financial well-being as an adult. An emerging body of research indicates that summer employment programs also lead to decreases in violence and crime. Work experience may also benefit youth, and high school students specifically, by fostering various non-cognitive skills, such as positive work habits, time management, perseverance, and self-confidence.” (My bold)

This is hardly surprising news to anyone who had a summer job when they were young. An additional benefit from youth employment not mentioned by the authors is that the low-skill, low-paying jobs held by young people also provide them with information about what they don’t want to do when they grow up. Working in a fast food restaurant or at the counter of a store in the local mall helps a young person appreciate how hard it is to earn a dollar and provides a tangible reason to gain more skills in order to increase one’s productivity and earn a higher wage.

Unfortunately, many young people today are not obtaining these benefits. The chart below depicts the national teenage unemployment rate and labor force participation rate (LFP) from 2005 to 2015 using year-over-year August data from the BLS.

national teen unemp, LFP

During the Great Recession teenage employment fell drastically, as indicated by the simultaneous increase in the unemployment rate and decline in the LFP rate from 2007 to 2009. From its peak in 2010, the unemployment rate for 16 to 19 year olds declined slowly until 2012. This decline in the unemployment rate coincided with a decline in the LFP rate and thus the latter was partly responsible for the former’s decline. More recently, the labor force participation rate has flattened out while the unemployment rate has continued to decline, which means that more teenagers are finding jobs. But the teenagers who are employed are part of a much smaller labor pool than 10 years ago – nationally, only 33.7% of 16 to 19 year olds were in the labor force in August 2015, a sharp decline from 44% in 2005.

Full-time teenage employment is unique in that it has a relatively high opportunity cost – attending school full time. Out of the teenagers who work at least some portion of the year, most only work during the summer when school is not in session. Some teenagers also work during the school year, but this subset of teenage workers is smaller than the set who are employed during the summer months. Thus a decline in the LFP rate for teenagers may be a good thing if the teenagers who are exiting the labor force are doing so to concentrate on developing their human capital.

Unfortunately this does not seem to be the case. From 2005 to 2013 the enrollment rate of 16 and 17 year olds actually declined slightly from 95.1% to 93.7%.  The enrollment rate for 18 and 19 year olds stayed relatively constant – 67.6% in 2005 and 67.1% in 2013, with some mild fluctuations in between. These enrollment numbers coupled with the large decline in the teenage LFP rate do not support the story that a large number of working teenagers are exiting the labor force in order to attend school full time. Of course, they do not undermine the story that an increasing amount of teenagers who are both in the labor force and attending school at the same time are choosing to exit the labor force in order to focus on school. But if that is the primary reason, why is it happening now?

Examining national data is useful for identifying broad trends in teenage unemployment, but it conceals substantial intra-national differences. For this reason I examined teenage employment in 10 large U.S. cities (political cities, not MSAs) using employment status data from the 5-year American Community Survey (ACS Table S2301. 2012 was the latest data available for all ten cities).

The first figure below depicts the age 16 – 19 LFP rate for the period 2010 – 2012. As shown in the diagram there are substantial differences across cities.

City teenage LFP

For example, in New York (dark blue) only 23% of the 16 – 19 population was in the labor force in 2012 – down from 25% in 2010 – while in Denver 43.5% of the 16 – 19 population was in the labor force. Nearly every city experienced a decline over this time period, with only Atlanta (red line) experiencing a slight increase. Five cities were below the August 2012 national rate of 34% – Chicago, Philadelphia, Atlanta, San Francisco, and New York.

Also, in contrast to the improving unemployment rate at the national level from 2010 – 12 shown in figure 1, the unemployment rate in each of these cities increased during that period. Figure 3 below depicts the unemployment rate for each of the 10 cities.

City teenage unemp rate

In August 2012 the national unemployment rate for 16 – 19 year olds was 24.3%, a rate that was exceeded by all 10 cities analyzed here. Atlanta had the highest unemployment rate in 2012 at 48%. Atlanta’s high unemployment rate and relatively low LFP rate reveals how few Atlanta teens were employed during this period and how difficult it was for those who wanted a job to find one.

The unemployment rate may increase because employment declines or more unemployed people enter the labor force, which would increase the labor force participation rate. Figures 2 and 3 together indicate that the unemployment rate increased in each of these cities due to a decline in employment, not increased labor force participation.

The preceding figures are evidence that the teenage employment situation in these major cities is getting worse both over time and relative to other areas in the country. To the extent that teenage employment benefits young people, fewer and fewer of them are receiving these benefits. From the linked article:

“The substantial drop in teen employment prospects has had a devastating effect on the nation’s youngest teens (16-17), males, blacks, low income youth, and inner city, minority males,” wrote Andrew Sum in a report on teen summer employment for the Center for Labor Market Studies at Northeastern University. “Those youth who need work experience the most get it the least, another example of the upside down world of labor markets in the past decade.”

Unfortunately, in many cities the response to this situation will only exacerbate the problem. Seattle and Los Angeles have already approved local $15 minimum wages, and a similar law in the state of New York that applies only to fast food franchises was recently approved by the state’s wage board. While many people still question the effect of a minimum wage on overall employment, there is substantial empirical evidence that a relatively high minimum wage has a negative effect on employment for the least skilled workers, which includes inner-city teenagers who often attend mediocre schools. Thus it is hard to believe that any of the seemingly well-intentioned increases in the minimum wage that are occurring around the country will have a positive effect on the urban teenage employment situation presented here. A better response would be to eliminate the minimum wage so that in the short run low-skilled workers are able to offer their labor at a price that is commensurate to its value. In the long run worker productivity must be increased which involves K-12 school reform.

Do Energy Efficiency Regulations Create Jobs?

Earlier this year, the Department of Energy (DOE) finalized a regulation setting energy efficiency standards for microwave ovens. At the time, Heather Zichal, the Deputy Assistant to the President for Energy and Climate Change, had this to say about the regulation:

…in his State of the Union Address this year, the President set a bold new goal: to cut in half the energy wasted in our homes and businesses over the next 20 years. Part of how we will achieve that goal is by making appliances more energy efficient. Not only will that help Americans keep more money in their pockets, it will also curb pollution and spark innovation that creates jobs and ultimately brings better products to the marketplace. That’s why we are proud to announce today that the Department of Energy has finalized new energy efficiency standards for microwaves… (emphasis added)

I’ve written elsewhere about why Americans should be skeptical of the environmental benefits from this regulation, as well as other energy efficiency regulations emanating from the Department of Energy. Putting that aside for a moment, I’d like to focus on the last part of Ms. Zichal’s comment, that energy efficiency regulations will create jobs.

As an example, let’s look at the microwave oven regulation that Ms. Zichal cites in her blog post. According to the Department of Energy’s own employment analysis, the employment effects of this regulation are negligible. Since American consumers import roughly 99% of microwaves purchased, the DOE expects that effects on domestic production jobs will be virtually zero.

In addition, DOE models indirect employment effects on other industries as a result of changes in consumer behavior and investment decisions resulting from the regulation. While these numbers are highly uncertain given the inherent difficulty in predicting these things, the DOE estimated the rule will probably eliminate jobs in the short term, estimating between 551 jobs destroyed and 17 jobs created by 2016. In the long run, employment effects may be positive, with the regulation potentially creating between 153 and 697 jobs by 2020. However, the DOE notes there are limitations inherent in its model when calculating these effects, especially when trying to predict jobs created years in the future. For example, the DOE states:

Because [the agency’s model] does not incorporate price changes, the employment impacts predicted by [the model] would over-estimate the magnitude of actual job impacts over the long run for this rule.

The DOE goes on:

…in long-run equilibrium there is no net effect on total employment since wages adjust to bring the labor market into equilibrium. Nonetheless, even to the extent that markets are slow to adjust, DOE anticipates that net labor market impacts will be negligible over time due to the small magnitude of the short-term effects.

Creating jobs should never be the primary reason for justifying a regulation.  In most cases, jobs created by regulations are compliance jobs, which constitute a cost of regulating, not a benefit. More importantly, these types of predictions about jobs created and destroyed ignore the true employment costs of regulation that occur when individuals lose their jobs because of a rule. These costs include things like lost earnings, loss of health insurance, stress, additional health effects, etc. Despite this, by the DOE’s own estimates job creation does not appear to be a solid justification for this particular energy efficiency standard.

Lessons from North Carolina’s proposed budget

In today’s Room for Debate at The New York Times, I discuss what’s good and what is worrying about North Carolina’s proposed biennial budget.

The good: a doubling of the state’s Rainy Day Fund and end to the estate tax. But a big controversy surrounds the legislature this week. Lawmakers decided to cut unemployment benefits by one-third. This move disqualifies the state from receiving additional emergency unemployment insurance funds from the federal government, affecting 170,000 jobless in the state.

The issue points to the perennial calls for reform to the federal-state Unemployment Insurance (UI) program. North Carolina is one of many states that must pay the federal government back what it has borrowed to offer extended benefits to its residents, or face higher payroll taxes. Their choices are tough ones to make: raise the state payroll tax (or taxable wage base) and replenish the trust fund – which has its own effects on the economy and the workforce – or cut benefits. A better solution is to re-think our approach to social insurance, something economists, such as Harvard’s Martin Feldstein, have been highlighting the structural flaws of UI since the 1970s.

n.b. update: a reader rightly notes at the NYT – the states must pay back the money they’ve borrowed from the federal government to continue paying benefits. But they don’t have to pay back the temporary EUC program. 

Twenty states face bill for Unemployment Benefits

The Center on Budget and Policy Priorities has a new analysis highlighting the $35 billion bill that 20 states owe to the federal government for covering benefit extensions. The report points to one of the design problems with the current program. The joint federal-state unemployment insurance program (UI) is financed via a payroll tax. States have kept the tax too low and thus did not build up enough reserves in the UI fund to weather the recession. This isn’t the first time UI has run into this problem, in fact it’s a perennial issue. Alan Krueger of Princeton provides a summary of some of the structural weakness in UI, a program unchanged since the New Deal.

While it is widely recognized that UI is structurally broken, solutions vary considerably. In a paper for The Brookings Institute, Rosen and Kletzer suggest “strengthening the federal role” in UI that would require states to harmonize eligibility criteria and benefit levels, increased eligibility and benefits financed by a higher FUTA tax. In addition Rosen and Kletzer propose a wageloss insurance program for those who become employed at a lower wage than their previous job; and lastly private accounts for the self-employed.

The Tax Foundation proposes another set of fixes. These include loosening up restrictions in the program to allow states to experiment with alternative programs, as well as the establishment of individual accounts.

In September the Obama Administration proposed a ‘sweeping reform’ of the current program. Included was the wageloss subsidy for the employed. In last week’s SOTU the president stressed transforming UI into an employment program via job training services. But these new appendages avoid the problem that UI was created to address: how to smooth private consumption during times of temporary and involuntary unemployment?

What about a private insurance model? Trooper Sanders makes the case at The Huffington Post.

Does unemployment insurance fuel economic growth?

Congress faces a year-end deadline on unemployment insurance. Currently, in states with the highest levels of unemployment, jobless benefits last for nearly two years. Extensions of benefits began in 2008 and have continued throughout the economic downturn. These extensions are set to expire, leaving all workers with the standard six months of benefits. President Obama has told Congress to make further extensions a priority:

“With millions of Americans still looking for work, it would be a terrible mistake for Congress to go home for the holidays without extending unemployment insurance. . . . Taking that money out of the economy now would do extraordinary harm to the economy.”

Here, the president is arguing that because the unemployed are likely to spend money that they receive rather than save it, the Keynesian multiplier will be high for unemployment benefits. Some evidence does support this hypothesis, suggesting that in the best case scenario, providing unemployment benefits can increase short-run economic output. However, this Keynesian view ignores the long run consequences of government provided unemployment insurance.

As jobless benefits continue to lengthen and unemployment insurance is funded with debt rather than payroll taxes, this program morphs from insurance to welfare. When policymakers make the case that unemployment insurance needs to be extended to protect the jobless and to spur the economy as a whole, they tend to ignore the perverse incentives that are inherent in the program. Unemployment insurance pays people not to work, and research has shown that longer unemployment benefits lead people to go without work for longer. Just before benefits end, the unemployed are most likely to find a job. By reducing the incentives for the unemployed to seek work, extended unemployment benefits prevent economic growth because they keep some people from working and adding to GDP.

While the federal government helps fund unemployment benefits, the unemployment trust funds are managed at the state level. Even before the economic downturn, many states lacked the reserves in these funds to handle an uptick in the number of unemployed workers. States are largely now funding unemployment insurance with loans from the federal government. A recent study from the Tax Foundation finds that states will be paying off these loans for years to come, facing higher interest rates as they continue to borrow increasing levels.

As Ben VanMetre wrote last week, rather than extending these flawed benefits, Congress should take up unemployment insurance reform. Eileen Norcross and I have argued that Unemployment Insurance Savings Accounts would provide the security of the current system without the unintended consequences. Under UISA, workers would contribute to individual savings accounts that they could access upon becoming unemployed. Because individuals would own their own accounts, they would not face incentives to remain unemployed in order to collect more benefits. Extending jobless benefits will not help either the economy as a whole or the unemployed in the long run, and turning unemployment insurance into a need-based program will only worsen its perverse incentives. Real reform would create improved incentives for all involved.

Requiring Volunteer Work for Unemployment Benefits

Georgia’s historically high unemployment rate coupled with the fact that its unemployment trust fund has recently reached insolvency, has led law makers to reconsider the structure of their state’s unemployment system. One solution posed by John Albers, a Republican Senator in Georgia, is to require unemployed individuals to volunteer for at least 24 hours a week with a nonprofit organization in order to receive their unemployment benefits.

The problem that Albers is seemingly trying to address is the idea that generous unemployment benefits can increase the attractiveness of unemployment. As Eileen Norcross and Emily Washington argue in their paper The Cost and Consequence of Unemployment Benefits on the States:

The perverse incentives of unemployment benefits are well documented. Subsidizing unemployment draws out a job search. Generous benefits that subsidize “temporary idleness” may result in “chronic idleness.” As the state makes chronic idleness more attractive, more and more people will choose that option over productive employment. As people remain unemployed, their decreased spending will slow production throughout the economy, and the system will become less and less sustainable.

I think Albers’s solution is an interesting idea in the strict sense that it is a creative approach to making unemployment benefits less desirable. Essentially, requiring volunteer work increases the costs of collecting unemployment benefits and thus, in theory, creates a greater incentive for individuals to decrease the duration of their unemployment.

I do not, however, think that this legislation will fix Georgia’s unemployment fund. There are two big problems with the solution posed by Albers: (1) there are legal barriers that will likely prevent this legislation from becoming law and (2) the problem isn’t volunteer work, its unemployment.

A better way to address the solvency of Georgia’s unemployment trust fund is the creation of private Unemployment Insurance Savings Accounts (UISA). Instead of making compulsory contributions to public trust funds, UISAs require employees and employers to contribute to individual savings accounts that the employees can access during unemployment. If an individual is never unemployed, the money accrued in their UISA rolls over into their retirement account. As Norcross and Washington make clear, the virtue of UISAs is that they turn unemployment insurance into savings.

It is important to point out that the idea of UISA is somewhat controversial because it requires individuals to save. In other words, it moves the system from forced unemployment contributions to forced savings. Although both systems are coercive, UISAs would certainly be a step in the right direction for Georgia and will likely be a better solution than forcing people to volunteer (which, after all, is oxymoronic).

A Bill to Increase Discrimination Against All Workers?

According to Robert Pear of the New York Times, the President’s latest stimulus bill includes a provision allowing unsuccessful job applicants to sue if they believe they were denied a position because they are unemployed.

The advocates of the proposal, of course, are hoping that this will discourage discrimination against the unemployed. Indeed, we can be pretty sure that it would discourage open discrimination against the unemployed (according to the EEOC, some want ads openly say that the unemployed need not apply). But, of course, ending open discrimination doesn’t end actual discrimination. More importantly: might this have just a few unintended consequences?

Some critics worry that this would just lead to more costly, frivolous law suits. Probably. But I’d also guess it will lead to less employment of people.

The key to understanding why is to think of a worker the way a firm’s owner does: as one among many inputs in the production process. A worker helps a firm make its product or service, but there are other ways to skin that cat. Instead of hiring one more worker, the firm’s owner could just increase the hours of her current employees, or she could buy a few more machines to do the work, or she could outsource aspects of the production process to other companies (perhaps those who work in places without such laws?), or she could simply not expand. The point is that a firm has lots of choices and anything that makes one of those choices (probabilistically) more expensive will cause the firm to rely more-heavily on its other options.

Maybe this should be called the full-employment-for-machines act?