Unemployment Benefits: A Rational Course

I’ve long been an opponent of the unemployment policy usually advocated by our government.  In my moments of most extreme Libertarian I can make the case for no unemployment benefit system at all.  People, understanding that they won’t have a program to fall back on will make efforts to protect against the downside.  This might take the form of more aggressive saving or, perhaps, not getting fired in the first place.

However, not all terminations are due to performance, many are due to economic conditions out of the control of the employee.  Further, it’s unlikely that I’d be able to prevail in my rather “draconian” response to unemployment.  So, knowing that benefits are going to be provided, how best to work within the system to create the best outcome?

Other than its existence, I have two problems with unemployment benefits:

  1. The benefit too closely approximates the typical wage.
  2. The duration of the program is too long.

The system creates the wrong incentives.  In the first place, it reduces the value of working.  For example, if I lose my $10 an hour job and can pull $325 in benefits, the marginal value of me returning to work is $75.  [Maybe $125 or so – I seem to remember the first fifty is “free.]  So the value of working 40 hours moves from $400 to $75.  An hourly rate of $1.88.  In the second place, the system is built with the incentive to delay returning to the workplace until the benefits expire.

So, what to do?

It seems to me that if I had bought into building a system that worked, that is I agreed to set aside the ideology and build a program I might not 100% agree with, I would first define the goals.  It might go like this:

  1. Provide folks assistance to get through the transition to the next job.
  2. Return folks to the workforce as soon as possible.

And the method I would use to build the program that solves both of these goals would be this:

  1. Determine the mean time to return to work without the debilitating incentive of making money while not working.
  2. Pay the unemployed a lump sum regardless of employment status.
    1. Either literally pay the individual a lump sum in the form of one check.
    2. Guarantee weekly benefits for the duration of the identified mean regardless of employment status.

This satisfies the [dubious] requirement of the government providing assistance in the face of adversity while also removing the perverse incentive not to return to the workforce.  In fact, it might actually provide the incentive to return more quickly; who can pass-up on “double dipping.”


2 responses to “Unemployment Benefits: A Rational Course

  1. I think you’re overlooking the biggest incentive: most people prefer working. Most people don’t calculate whether they can get more not working or working in the short term. They know that in the long term they build on what they can start at, and they have a stronger sense of self worth while working. That’s why when jobs are available, unemployment dips below 4% (which is what economists consider ‘minimum’ unemployment based on natural transitions and shifts). That incentive has to be taken into account. I think at the very least it argues against a lump sum, since most people aren’t likely as enticed to remain unemployed by the money.

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