The Irrationality of Unemployment Insurance

In ECON 101, we are taught the concept of “structural unemployment.” Government economists say that structural unemployment, which refers to the segment of the work force unemployed due to “structural change” in the economy, is unavoidable. Therefore, a good 3-5 percent of Americans can be out of work and the government will still say we have “full employment.”

In truth, “structural unemployment” is created by the misallocation of financial resources resulting from the Federal Reserve’s fiat-money central banking regime and other government interventions into the economy, most notably minimum wage laws. Under a gold standard and laissez-faire, there would be real full employment. But of the myriad cockamamie government intrusions into the market unnecessarily causing unemployment, one that deserves special focus amid the current economic depression is unemployment insurance.

From Textbooks to Real Life

Let’s make this personal. I have a younger brother, of whom I’m very proud, who decided to start his life over in Medford, Oregon, 2,300 miles away from his home in South East Michigan. Moving out there with nothing more than he could fit in his car, he quickly got a sales job at Circuit City. A few weeks later, he was promoted to a management position. That was a little over six months ago now.

Now, as you know if you keep up with the business press, Circuit City declared bankruptcy a while back and is now on the verge of being forced into liquidation. Many of the firm’s stores have been closed, but my brother’s in Medford, OR is still open—for now. If they are shut down, then my brother will receive 80 percent of his wages for a full year as part of Oregon’s unemployment insurance program. The only catch: he can’t find another job in the meantime.

Now who in their right mind would want to find a new job given this scenario? Imagine your boss coming in and telling you he has to cut your pay by 10 percent—but the good news is, you only have to work one day a week. Ninety percent of your pay for 20 percent as much work would seem like a pretty good deal, wouldn’t it? How about 80 percent of your pay for zero percent as much work? Who would screw up a sweetheart deal like that by going out and finding a new job?

Disincentivizing Work

Theoretically, of course, my brother could find a job that offered him higher pay. In that case, he might be smart to take it. But when a company goes bankrupt, one of the factors contributing to their insolvency is that they were paying inefficient employees too much money. My brother is a great salesman, but he’s undoubtedly the exception to the rule. After all, if Circuit City were paying their employees the “right” amount, they wouldn’t be going under. If they were overpaying by, oh say 20 percent, then their former workers from Oregon would have a hard time finding new jobs that paid them as much as they’ll receive just for staying home and doing nothing. Where is the incentive to find work?

This mismatch of incentives doesn’t apply only to firms that have gone belly-up, either. Even employees who are laid off have generally been paid too much: if their marginal utility was higher than the wage they were being paid, then the company would have kept them—so of course they’re going to have to take a pay cut to find another job! Why, then, does the government incentivize not finding a lower-paying job?

President-elect Barack Obama, of course, wants to extend unemployment benefits across the nation (and who knows, maybe the world, too). This is obviously a prescription for extended mass unemployment and a deepening of the current depression. If the government must intervene, and apparently it must, then the concept of “wage insurance” makes a lot more sense.

Wage Insurance: An Alternative Idea

Wage insurance is a program whereby displaced workers receive benefits—but only once they find a new job. For example, if a factory worker who had been making $20 per hour were laid off and got a job at a convenience store for $10 an hour, wage insurance would make up part (or all) of the $10 differential between his previous wage rate and his new, lower wage rate. Over time, this benefit would be scaled back as the worker learned new skills that would presumably result in salary increases.

Now as you can see, unemployment insurance incentivizes not finding a job, while wage insurance incentivizes actually procuring employment. Which one do you think would do more to get us out of recession? Even better, unlike unemployment insurance which could never be handled by the free market (due to its incentivizing of bad behavior), wage insurance could be: workers could pay optional insurance premiums for individualized wage-insurance policies. Insurers would be happy to underwrite these moral hazard-free contracts.

Contrast this to our current situation: productive workers are forced to sacrifice their earnings through reduced wages and higher taxes to subsidize the unproductive and non-working. Only the government could set up such a perversely counterproductive and destructive scenario and call that which ails us—over-regulation—a miracle cure.

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