Thursday, January 27, 2011

Paying People Not To Work

by Larry M. Elkin, CPA, CFP®

To economists and the business-savvy elements of the public, the recent recession is history. But some who lost their jobs more than a year ago are still sitting at home ­ and getting paid to do so.

In 25 states workers are able to collect unemployment benefits for 99 weeks, thanks to emergency measures enacted by Washington after the widespread layoffs and job losses in 2008 and 2009. Ordinarily, unemployed workers receive only 26 weeks of state-paid support.

The extended unemployment benefits will continue through the end of this year, as part of the deal that President Obama negotiated with congressional Republicans last month to extend the Bush-era income tax rates.

Unemployment insurance is based on the theory that joblessness is a situation over which individuals have no control, like other things we insure against such as health problems, car accidents, and theft. This attitude makes sense when it is applied to short-term unemployment. There is nothing an individual employee can do to stop the plant she works for from being closed down, or to save her employer from having to cut payroll.

But studies have shown that, after the initial shock of job loss, motivation plays a big role in how quickly an individual secures new employment. When workers who have been receiving unemployment benefits approach the end of those benefits ­ and are therefore presumably most motivated to find new sources of cash ­ their chances of returning to work increase significantly, according to 1990 study cited by the Heritage Foundation.

This change in motivation can be explained as a change in what economists call the “reserve wage.” The reserve wage is the lowest pay rate that a worker is willing to accept in exchange for the inconvenience and costs associated with a particular proffered job. The costs of employment generally include things like buying work clothes, commuting, and eating more lunches out. Those who have been collecting unemployment benefits, however, also have to consider another cost: giving up their government checks. Once benefits run out, the cost of getting a job goes down compared to remaining unemployed, so the “reserve wage” drops.

In addition to potentially accepting lower wages, those who cannot count on unemployment benefits may also be willing to accept more inconvenience. They might, for example, consider jobs in other geographic areas or in other fields. Those without unemployment checks may also be willing to accept more risk in order to earn income. Many recent college graduates, who are generally new to the workforce and therefore ineligible for unemployment benefits, turned to entrepreneurship as a way to make their own jobs when employers were not hiring.

Meanwhile, people who get paid to not work frequently continue to not work. If you pay people to do something, they’ll generally keep doing it. That’s why, at Palisades Hudson, we don’t pay people to stay home and be sick. Instead of paid sick days, we provide a reasonable allotment of personal days and vacation time, which can be used for any purpose ­ whether that’s resting when sick or taking advantage of good health and good weather to go hiking. If people run out of paid time off and then fall ill, we work with them to arrange for unpaid time off while they recuperate.

Social acceptance of unemployment also makes people less motivated to find new jobs. A study released by the World Bank last summer found that people whose peers are also unemployed focus less on their pursuit of work, leading to a situation in which, as the number of people who are unemployed increases, each unemployed person’s effort to get back to work declines. The study explains, “If others are unemployed, I will search less and extend my unemployment duration, in turn affecting others’ return to work.” By allowing for longer periods of unemployment, extended unemployment benefits can make entire groups of people less likely to return to work.

Some people argue that, consequences aside, unemployment insurance benefits are a human right. The United Nations’ Universal Declaration of Human Rights states in Article 25, “Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family…and the right to security in the event of unemployment…or other lack of livelihood in circumstances beyond his control.” Yet this same document, in Article 23, defends “the right to work.” It does not say anything about the right not to work.

Long-term unemployment insurance, by promoting long-term unemployment, makes it harder for people to return to work when their benefits eventually do run out. While they’re not working, they miss out on opportunities to build new skills, foster networking connections and keep up with developments in their fields.

A report by the Pew Center found that, of people who had been unemployed and had then found work, those who spent the longest time between jobs were most likely to say the new job was worse than the previous one. This could simply be because people who have been unemployed the longest are more likely to have run out of benefits and are therefore more willing to compromise. But it could also be that people who have sat on the bench too long lose the ability to compete for the kinds of jobs that would be most satisfying for them.

Our society drew the line at 26 weeks. Amid spectacularly bad circumstances a few years ago, we nearly quadrupled that period. The crisis of 2008-2009 is well past. Even though unemployment will almost certainly still be high at the end of this year, it will be time to start getting the labor market back to normal. One of the first steps is to resume paying people to work, rather than not to work.

For more articles by Larry Elkin on financial, business, and other topics, view the Palisades Hudson newsletter, Sentinel, or subscribe to my daily opinion column, Current Commentary.


  1. Dear simplistic salaryman:

    1) Referencing a Heritage Foundation paper from 1990 before the offshoring of white collar/technical work in the '90's and '00's started in earnest? Wake up! Jobs are gone forever. Global salary for an average engineer = $27K/yr. Can you live and raise a family on $27k? I know - that's what I paid when as a manager I moved IT work offshore.

    2) I got paid less because my employer had to pay into the unemployment fund for _all_ employees. I would have preferred to have the money and no insurance. Since I paid for it, I want it. Same goes for Social Security - I would have preferred my own investments.

    3) I had no choice about paying into the unemployment fund. Nor did I have any choice about the quality/amount of coverage. Forced contributions and arbitrary, government designated coverage.

    4) Duh. Just about every employer these days offers only a fixed pool of Personal Leave days.

    5) "reserve wage"? What happens wen the reserve wage doesn't even cover mortgage and health insurance and taxes? I have the maximum unemployment insurance in my state and it does not cover those three. It is less than half of the monthly nut pared down to the bone - the rest comes out of my retirement funds.

    Lest you have the wrong impression, I spent 25 years in self-employment before taking a corporate job for 12 years. During the last 4 years of corporate employment I moved project after project overseas - because US labor was cost prohibitive.

    Our corporations are doing fine. Too bad that there will no longer be sufficient Americans to purchase their products. No matter, there are the emerging economies to provide customers.

    "Welcome to WalMart!" "Would you like fries with your order?" "Can I super-size your order for you?"

  2. @ Anon 10:21

    1). The paper from the Heritage foundation still holds true. Yes, many jobs are gone. However, that is hardly the point behind this opinion piece or the Heritage paper for that matter. The author is referencing the fact that unemployment insurance promote laziness. Especially when they are guaranteed for 99 weeks!!!

    However, there are plenty of jobs that people are unwilling to take because it is 1). "beneath them" 2). It pays less than what unemployment insurance would provide or 3). Both. If I offer you the choice of 99 weeks of guaranteed money, and you don't have to lift a finger for it; or a part-time job at McDonalds, which are you going to take? Obviously 99.9% of people would take option #1. Financially speaking, it makes the most sense. But most people do not even realize that when you receive unemployment benefits, you can still work and receive partial benefits. If you work a part-time job @ 20hrs/week, you will be given essentially half the benefits you would have received if you had no job at all. If i were an employer, I would much rather hire the candidate that at least attempted to retain some level of skill as opposed to the couch potato who probably used their food stamps to buy twinkies and HoHo's.

    But on a side note: you also fail to even suggest as to why jobs have left? If you had taken the time to understand why jobs were leaving in the first place, you would (should) have made the smart decision to adapt by either: A. Getting into a new field, B. Improving your skills to advance in your field, and therefore becoming a vital commodity, or C. Find ways to become less dependent on government handouts when the going gets tough. People today do not have a backup plan, no investments and live paycheck to paycheck. If I lost my job today I would be able to support myself with no handouts for at least 3 years. I think in that amount of time I could easily find a job in my field or re-tool myself for a new field.

    Like Ron Paul always says, you have to change the way you think about the role of government, if you want it to take care of you from cradle to grave, this is what you get.

    2). If you are FORCED to pay into a socialized system, you SHOULD reap the benefits. However, there is a simple way of ending socialized programs like SS and Medicare. You take care of the people guaranteed to receive the benefits that cannot reasonably find employment (grandma) and then those of us youngsters who will never see a dime of SS should not have to pay into the system. It's a slow but smooth transition that would wind it's way down in time.

    3). Your gripe is warranted. However, the author of this opinion piece isn't criticizing the individual for being forced into paying into a system, he simply criticizes the system itself. If you guarantee someone income and they don't have to lift a finger to earn it, they will become a couch potato. Simple as that. After that, the economy is WORSE off. Now, that individual has not had employment for over a year and a half, has lost some, if not all, of their respective skill and is basically useless.

    5). I think you may have misunderstood "reserve wage". The reserve wage is not your benefits. It's the effect that accepting the unemployment benefits has on your personal "reserve wage" when you begin looking for employment.

    You also should ask yourself WHY your maximum unemployment doesn't cover your: Mortgage (which was inflated to begin with), Healthcare (inflated) and Taxes. The government had a hand in making all three of these expenses cost more (insert your "duh" comment here), so no wonder they offer and extend benefits. It's a revolving door of stupidity. Government interference always raises prices, and then when you are laid off because of this they are there to pick up the pieces...unemployment check in hand.