25 Feb 2015

Unemployment Benefits: The Government Gets What It Pays For

Economics, Shameless Self-Promotion 44 Comments

My latest article at FEE. An excerpt:

Just about everyone agrees that incentives affect behavior, but economists really mean it. That’s because economists take the logic of incentives further than most other people are willing to. Such analysis often reveals that government policies have unintended consequences that seem shocking to the average person. The list includes welfare programs that lead to higher rates of birth out of wedlock, seatbelt laws that lead to more pedestrian deaths, and even the possibility of changes in estate taxation that lead to people strategically timing their deaths.

But perhaps one of the most perverse distortions comes from unemployment benefits. Economists argue that these can provide an incentive for people simply not to work. Indeed, a new NBER working paper by Marcus Hagedorn, Iourii Manovskii, and Kurt Mitman estimates that the abrupt end of unemployment benefit extensions led to 1.8 million additional new US jobs created in 2014.

The theory here is straightforward: when the government subsidizes an activity, other things equal, people will engage in more of it.


44 Responses to “Unemployment Benefits: The Government Gets What It Pays For”

  1. E. Harding says:

    Has anyone considered the effect of poorly-timed irregular Federal programs on the “jobless recovery” phenomenon?

  2. E. Harding says:

    BTW, Yellen and Akerlof argued contraception and abortion was more important than welfare and stagnant wages in explaining increasing illegitimacy:

  3. D. Simpson says:

    The purpose of the unemployment insurance isn’t to reduce unemployment. It is to help support the unemployed while they look for a new job that uses their skills. Yes, it prolongs unemployment.

    Of course, if you remove it, you will force people to take the next job offered to them, even if the job doesn’t require their qualifications or their skills.

    What you get is is a spiralling down of people are taking jobs that are ‘beneath’ them, for which they are overqualified. Unemployed guy #1 takes job #2, guy #2 who was qualified and looking for a #2 type job now has to take job #3. And so on.

    It is a waste of human potential and it has the effect of suppressing wages.

    • Major.Freedom says:

      That is not a waste, it is a gain.

      What is a waste is to steal from productive people so as to subsidize those who believe they are better than what the job market offers to the point of refusing to work.

      Unemployment benefits are not free. The cost it incurs wastes the potential of those who are forced to pay for it.

      Also, you conflated nominal wages with real wages. Falling nominal wages that is associated with rising employment increases real wages. It does not suppress them. 1000 people working for $1000 results in higher real incomes than 900 people working for $1000 and supporting 100 with what only 900 workers can produce.

      Your vision of human potential ignores the costs of having your vision imposed. As a result, what you want actually reduces real standards of living.

  4. Major.Freedom says:

    “Indeed, a new NBER working paper by Marcus Hagedorn, Iourii Manovskii, and Kurt Mitman estimates that the abrupt end of unemployment benefit extensions led to 1.8 million additional new US jobs created in 2014.”

    Well obviously that means the economy abruptly turned around. Employers everywhere abruptly started to offer 1.8 million more jobs because the demand for their products abruptly increased. Therefore unemployment benefits for those 1.8 million people was no longer needed.

    Unemployment benefits are beneficial because they reduce the fall in demand that would otherwise take place in its absence. This means either that that is the intention of UI, or that is the actual effect. Period, end of story.

    Studies like this don’t refute the fallback belief that UI “helps” with reversing the counter-factual fall in demand. We have to essentially ignore it and refer to how much worse things would have been. You know, the whole fallacious social costs and social benefits ideology. Individual victims? Pshaw, they are necessary for society to progress.

  5. Transformer says:

    Assume a world with the following attributes

    – Everyone is selfish and would never give to charity
    – Food only lasts one day and if you don’t eat every day you die
    – Frictions in the labor market mean that it may take more than a day to get a job if you lose your current one.
    there is a 1% chance of job loss in this world

    Someone proposes that to avoid the risk of death a compulsory 0.1% income tax be introduced to provide food for the recently unemployed.

    It would seem rational for everyone to support this mandatory tax. It costs you 0.1% to insure against a 1% chance of death.

    How would anarcho-capitalist support their opposition to this tax ?

    • Transformer says:

      Oh s**t,

      No sooner had I hit the enter key, than I realized the answer.

      In this scenario there would be plenty of free-market insurers to step in and solve the problem.

      • Harold says:

        Since we have a hypothetical world, lets add oner more attribute – everyone as well as being selfish is also hopelessly optimistic about their job security. Everyone thinks they will never be unemployed, so will never contribute to a voluntary insurance scheme. The insurance company employee, being disinterested in individual cases and having data to hand, can see that it is statistically a good deal to offer unemployment insurance. However, given the hopeless optimism, nobody take up the offer. Everyone thinks it would be a great deal for everyone else, but not for themselves. The Government employee, being disinterested in individual cases and having data to hand, is able to see that statistically people would be better off with the 0.1% tax. Having the power to make it mandatory, everyone contributes. Every member of the society believes that everyone else is better off with the mandatory tax. It is only themselves that is not, because only they are certain not to loose their job. They are of course wrong in this assessment, as they are just as likely to lose their job as anyone else.

        How would anarcho-capitalist support their opposition to this tax ?

        My guess is that they would say the actions of people in not taking out the voluntary tax shows their preference is to not have such a scheme, and it is morally wrong to force people to act against their preferences as long as their preferred action doesn’t directly hurt anyone else. Outcomes do not count.

        It is not a valid argument to say that people do not behave in the way set out in the thought experiment. You cannot refute a thought experiment by rejecting the terms, only reject its relevance to the real world, which is a separate argument.

        My take is that the outcome is worse in the non-insurance world, and that outcomes do count. The individuals that die for lack of insurance also hurt family members, and the loss of their skills hurts all of society. So their actions indirectly harm others as well as themselves.

        So the no-force position may be consistent, but if you follow this philosophy you have to accept that by not considering outcomes you may end up with a society that most people would say was worse.

        • Scott D says:

          One problem I see with this thought experiment is that no voter would support the tax because no one believes it to be necessary for themselves, and since everyone is completely selfish, they don’t support it for anyone else either. Either a totalitarian government must be in charge, or the government would have to deceive everyone somehow, because this policy will be wildly unpopular and in a democracy, would result in the ejection of any and all responsible. Democracies are dysfunctional, but that doesn’t mean that politics doesn’t matter.

          So, assume a dictator with complete control over everything. Heck, make him a supervillain if we have to. Can’t have his military leaders planning a coup de’etat, can we?

          • Harold says:

            This tax comes as part of the package. Since it is small nobody is that bothered, and both parties support it. That’s democracy.

  6. Bob Murphy says:

    Transformer and Harold: Besides voluntary insurance markets, here are some ideas off the top of my head:

    ==> Family could help. I know you ruled that out with the assumption of pure selfishness, but it’s not obvious how humanity survives to the next generation if that’s what you mean.

    ==> People could save some of their paycheck, building up a cushion to get them through unemployment spells. This also explains how people are able to survive the weekends, when they’re not working. We don’t need a Saturday tax to prevent mass starvation.

    ==> Institutions could arise that voluntarily channel other people’s savings into the hands of those who need consumption now, in exchange for some of their future income. I shall call them…”banks.”

    • Scott D says:

      Bob, that’s crazy talk. Insurance, savings, banks…where do you come up with this utopian stuff?

    • Transformer says:


      Tighten up the assumptions a bit.

      – Everyone is selfish and would never give to charity
      – Food is the only good produced
      – Food only lasts one day
      – Food is used as money
      – If you don’t eat every day you die
      – There is a 1% chance of job loss on a given day in this world
      – Each day a lottery is drawn and 99% of people get jobs and 1% don’t. There are no other job opportunities until the next day.

      In this world lack of altruism and savings vehicles rules out all Bob’s suggestions I think.

      But a private insurance scheme where everyone pays a small % of their salary each day , in return for food on the days when they don’t work would solve he problem.

      Some people may be risk takers and not want to buy insurance. I suppose a purist anarcho-capitalist would say that’s fine – its their choice. But you could also make the case that all that death and avoidable suffering imposes a big externality in this society that should be addressed with a compulsory tax

      • Transformer says:

        Of course just because food only last one day, doesn’t stop loans being made against future food, so Bob is correct (on reflection) that that would indeed be an option.

        • Bob Murphy says:

          Phew! For a second I thought Transformer I was going to have to break out the Excel tables and show a hypothetical world where apples get harvested (and rot if not eaten) every period.

          • Transformer says:

            So if people decided that a tax is a bad idea but they could instead sell interest bearing bonds to provide food to the unemployed , would that have any effect on future generations ? Has that question ever come up on this blog ?

            (Perhaps if the future tax to pay off the bonds was only on people who would otherwise have been dead then they might not mind paying it?).

      • guest says:

        My response, below, in a comment block with maximum width.

        • Tel says:

          I can’t see anything in your response about the bats. My point was that we have a real-world scenario that matches Transformer’s requirements. Vampire bats trade blood amongst themselves because no individual bat can guarantee successful hunting on any particular night.

          In this world lack of altruism and savings vehicles rules out all Bob’s suggestions I think.

          Any economist would see there is no altruism at work amongst vampire bats; biologists invented the term “reciprocal altruism” for bizarre political reasons only because they would prefer to cut their own throats rather than admit some crusty old “right winger” economist was correct all along. The whole concept of “reciprocal altruism” is a contradiction in terms, if it’s reciprocal then it cannot be altruism, instead what we observe in the bats is more correctly known as “trade”.

          As for saving, the bats don’t have access refrigerators or blood banks.

          Whether there is some sort of financial instrument at work is difficult to directly measure, but from the commentary Sir Attenborough seems to think there is, and I would tend to agree with him. Exactly how that financial instrument operates is a matter of ongoing study, but somehow they extend temporary credit to one another, and keep track of who is a good payer, and who is not. This is a very close analog to how human economies operate.

    • Harold says:

      Family help is out because of charity. People believe in Saturdays, so they do put some aside. They do not put any aside for unemployment because they do not believe it will happen. Banks don’t lend to the unemployed because… they just don’t. It is getting convoluted. Lets simplify. Everyone gets taxed or 20% of the people die. Should we have the tax?

      • Tel says:

        Family helping their offspring is not charity, it is selfish genes.

        Why not simplify even further? You want tax and you are determined to get it come what may.

  7. Andrew_FL says:

    Transformer, what point are you trying to make by inventing a contrivance of a world? Are we now obligated to show capitalism works in all imaginary worlds, too?

    I mean *really* apples used as money? That doesn’t even make any sense, it is in logical contradiction to the essential properties of any medium of exchange.

    • Andrew_FL says:

      Sorry, Bob mixed me up. But “food only lasts one day” and “food is used as money” are *impossible* combinations of stipulations.

  8. Transformer says:

    These thought experiments were just me thinking aloud about scenarios where state intervention might be useful. I do not think I have successfully identified one here though.

    While far from deal I see no reasons why apples couldn’t be used as money.

    • Bob Murphy says:

      Here Transformer: Suppose Martians show up in the year 2050, look at the humans covering the Earth, living in laissez-faire splendor, and announce, “Unless you all implement States of the form that existed before the Great Libertarian Awakening of 2016, we will blow up the planet.” Now, should libertarians support the creation of States?

      • Transformer says:


        Suppose that there was a way to avert the attackers by building a weapon that would consume 90% of the Earth’s wealth.

        Everyone agrees to voluntarily give up their wealth to the weapon builders except 20% of the population who are statists and support the martian threat.

        Is it OK to tax these statists to protect the libertarian utopia ?

    • Andrew_FL says:

      It’s fairly standard textbook stuff that the medium of exchange is durable. Your food is hyper-perishable. No one would ever use that as money.

  9. guest says:

    “But you could also make the case that all that death and avoidable suffering imposes a big externality in this society that should be addressed with a compulsory tax”

    If everyone is selfish, what’s the motivation to tax other people? Everyone is selfish except those who want to steal from me? Sheesh.


    Anyway …

    You’re actually proposing something worse than allowing people to die of starvation.

    You propose that I be killed for resisting your hired goons’ attempt to steal from me so they can help someone to which I have no obligation.

    And there are administrative costs involved with your tax proposal, so the tax would have to be greater than the cost it purports to solve (it always is); Further still, you presumably are aware that people have a right to defend themselves from theft, so add to that tax the cost of enforcement.

    No thank you. Please stop trying to help me.

    I think it is you who must justify your proposal to steal from me in any of your scenarios.

    On the poor, consider this:

    Rockwell’s Thirty-Day Plan

    “DAY SEVENTEEN: Centrally planned agriculture, as imposed by Hoover and Roosevelt, is repealed: there are no more subsidies, payments-in-kind, marketing orders, low-interest loans, etc. Farm prices drop. Entrepreneurial farmers get rich. Welfare farmers go into another line of work. The poor eat like kings.”

    On externalities, consider this:

    Man, Economy, and State, with Power and Market

    “Two favorite, seemingly scientific, justifications for government activity and enterprise are (a) what we might call the argument of “external benefits” and (b) the argument of “collective goods” or “collective wants.” …

    “… The “collective goods” argument turns out, upon analysis, to reduce to the “external benefit” argument. …

    “… Secondly, the very concept of “collective goods” is a highly dubious one. How, first of all, can a “collective” want, think, or act? Only an individual exists, and can do these things. There is no existential referent of the “collective” that supposedly wants
    and then receives goods. …

    “… We come now to the problem of external benefits—the major justification for government activities expounded by economists. …

    “… A free exchange, where A and B mutually benefit, may be all very well, say these economists; but what if A does something voluntarily which benefits B as well as himself, but for which B pays nothing in exchange?

    “There are two general lines of attack on the free market, using external benefits as the point of criticism. Taken together, these arguments against the market and for governmental intervention or enterprise cancel each other out, but each must, in all fairness, be examined separately. The first type of criticism is to attack A for not doing enough for B. The benefactor is, in effect, denounced for taking his own selfish interests exclusively into account, and thereby neglecting the potential indirect recipient waiting silently in the wings.149 The second line of attack is to denounce B for accepting a benefit without paying A in return. The recipient is denounced as an ingrate and a virtual thief for accepting the free gift. …

    “… Generally, these ethical views are clothed in the “scientific” opinion that, in these cases, free-market action is no longer optimal, but should be brought back into optimality by corrective State action. Such a view completely misconceives the way in which economic science asserts that free-market action is ever optimal. It is optimal, not from the standpoint of the personal ethical views of an economist, but from the standpoint of the free, voluntary actions of all participants and in satisfying the freely expressed needs of the consumers. Government interference, therefore, will necessarily and always move away from such an optimum.

    “It is amusing that while each line of attack is quite widespread, each can be rather successfully rebutted by using the essence of the other attack! Take, for example, the first—the attack on the benefactor. To denounce the benefactor and implicitly call for State punishment for insufficient good deeds is to advance a moral claim by the recipient upon the benefactor. We do not intend to argue ultimate values in this book. But it should be clearly understood that to adopt this position is to say that B is entitled peremptorily to call on A to do something to benefit him, and for which B does not pay anything in return. …

    “… The second line of attack is of the opposite form—a denunciation of the recipient of the “gift.” The recipient is denounced as a “free rider,” as a man who wickedly enjoys the “unearned increment” of the productive actions of others. This, too, is a curious line of attack. It is an argument which has cogency only when directed against the first line of attack, i.e., against the free rider who wants compulsory free rides. But here we have a situation where A’s actions, taken purely because they benefit himself, also have the happy effect of benefiting someone else. Are we to be indignant because happiness is being diffused throughout society? Are we to be critical because more than one person benefits from someone’s actions? After all, the free rider did not ask for his ride.”

    • guest says:

      Also, allowing people to die when I could have prevented their deaths is not an externality since they are not entitloed to my assistance.

      To call it an externality is to claim that I have an obligation to someone, but this obligation has not been justified. You could, I suppose, try to establish the obligation by appeal to God, which could work, in theory.

      But then you’d be engaging in pushing your religion on others, and I’m not sure that’s the angle you intended to take.

      Apart from an obligation from God, I see no other way to justify the assumption that I’m obligated to provide live-saving taxes under threat of death.

      • Transformer says:

        Do you deny the existence of any externalities that would need to be addressed via legal rather than market means ? (Air pollution is an obvious example of something that might be such a one).

        • Tel says:

          Show me your process for measuring any “externality” and how you come up with a value for that.

          • Transformer says:

            I would just go with a standard definition like this one:


            • Tel says:

              None of that explains how to measure an “externality”, at best you have the supply and demand diagrams which outline the equilibrium theory, but given that you don’t know at which point the current economy is in equilibrium (e.g. what is the “equilibrium” price of oil in USD?) and you certainly don’t know where the equilibrium will end up once government regulation is imposed, nothing there is empirical.

              It’s worse though, even after the fact you don’t have a retrospective empirical measurement. Government regulation is imposed, and the price of various things moves… so does this address the “externality” well we just don’t know.

              The problem is that people are buying and consuming too much steel.

              Uh huh, says who?

              WTF is a “social cost” curve or a “social demand” curve? Who gets to decide those? I mean really, this just assumes the answer and draws a pretty picture to illustrate it. I want measurements. Tell me how to measure it.

              • Transformer says:

                I think the cost would be impossible to determine objectively, since it would be down to people’s subjective utility (or dis-utility)

                That is why (I think) a solution would need to be either negotiated between the parties (as in Coarse’s theorem) , or settled by some sort of judicial process.

              • Tel says:

                So you have a bunch of people who decide it bothers them to see other people driving cars… that’s an “externality” and Coase says they can pay people to not drive. Well hey, that’s totally workable, I’ll buy an old wreak so I can get paid not to drive it anywhere. I could buy several of them and get paid to not drive a whole lot more.

                Frankly that would be the most ridiculous thing I ever heard, I’m astounded anyone believes such rubbish.

                When that idea fails, those people decide to just force everyone else not to drive, so what “externalities” really means is a group of people forcing others to do it their way… same as Democracy or any other political system. Everything else is cover story.

                They then come up with “social cost” in order to feel righteous about what they just did. Transaction: what “social cost” means is a bunch of us don’t like what you are doing.

              • Transformer says:

                Well , I suppose that if people are happy to pay you to not drive a car you wouldn’t have driven anyway, then that’s their problem.

                Coarse’s theorem does kind of suck though for the victims of negative externalities that they are supposed to pay the perpetrators of the harm to stop harming them. Perhaps I’m misunderstanding it .

              • Tel says:

                Actually he said it doesn’t matter either way, providing the property right is well defined. Thus, if I have a right to drive, and people pay me not to drive, that’s supposedly economically equivalent to the converse situation where I have to buy the privilege of driving. Strangely, governments always swing towards the latter setup, but to add insult to injury they cite Coase as justification to say what they are doing is exactly what the free market would do.

                You can see why regular common sense people run a mile from anything to do with economics.

              • Harold says:

                Tel, the original question was do you deny the existence of externalities? You have explained that measuring such externalities would be difficult, but that is a different question.

        • guest says:

          Arbitrators can voluntarily be agreed to in a free market. Taxes aren’t necessary.

          Do you deny that individuals are entitled to defend themselves against legalese-justified violations of their individual rights when legal systems fail?

          If so, then you already believe in rights which are prior to law, and therefore supercede law. If not, then nothing is actually solved by introducing a legal system, since all we’re really doing is choosing not to disagree on something.

          But you don’t need a legal system to stop disagreeing with someone. There’s a *reason* for the disagreement – ignoring the reason doesn’t help.

  10. Anonymous for this Comment says:

    The extension of UI funded the first two years of my retirement.

    • guest says:

      Inflation ate away the purchasing power of your retirement money.

      • Anonymous for this Comment says:

        It would have done that anyway.

  11. S.C. says:

    What reason do I have to call the effects of unemployment benefits “distortions”?

  12. S.C. says:

    Also, why can’t property rights be considered an externality?

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