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Unemployment Insurance: A Permanent Entitlement?

Seems to be becoming one.

By Will Offensicht  |  April 20, 2010

The Washington Post recently touched off an intense argument amongst the Scragged editors.  The WaPo framed the question thus:

Millions of Americans have been forced to rely on unemployment payments for extended periods as the nation struggles through its longest period of high joblessness in a generation, and critics are taking aim, saying that the Depression-era program created as a temporary bridge for laid-off workers is turning into an expensive entitlement.

Unemployment payments total about $10 billion per month which adds a lot to the deficit.  Apologists say that there are no alternatives given that so many jobs have disappeared forever; critics say that unemployment payments discourage job seeking.

Sen. Jim Bunning notoriously held up a bill to extend unemployment benefits, saying that the government ought at least to figure out where the money would come from before spending so much more.  Sen. Jon Kyl made a more hard-hitting point:

"If anything, continuing to pay people unemployment compensation is a disincentive for them to seek new work," Kyl said. "I am sure most of them would like work and probably have tried to seek it, but you can't argue it is a job enhancer."

In support of Sen. Kyl, statistics indicate that people look for jobs much more intensely as unemployment payments are about to run out than they do when they have a long time yet to run.  Lawrence H. Summers, the current White House economic adviser, wrote:

"The second way government assistance programs contribute to long-term unemployment is by providing an incentive, and the means, not to work. Each unemployed person has a 'reservation wage' - the minimum wage he or she insists on getting before accepting a job. Unemployment insurance and other social assistance programs increase [the] reservation wage, causing an unemployed person to remain unemployed longer."

On the other hand, there still seem to be about six unemployed people for each available job, so no matter how hard they try, a great many of them aren't going to be employed anytime soon.  What to do?

The Cause Celebre

The story of an unemployed father of four touched off even more heated discussion here at Scragged HQ:

He receives $1,200 a month in unemployment benefits, less than half the $3,000 a month he brought home from his job. Now he is often behind paying about $1,500 in rent, a car payment and other expenses. "I'm stealing from Peter to pay Paul," he said, adding: "There's the cable, the phone bill. I owe the bank overdraft fees and the insurance is lapsing a little bit. I can't take my kids shopping for school clothes because I don't have enough to do that."

He needs a phone and a car to look for a job, but some of our staff wondered why he had cable.  He could sell the car and get an older one which might reduce his payments even if he was underwater on the car, but financial advisers generally say that unless you drive a Ferrari the cheapest car for you is the one you already own.

But then he made a statement reflecting precisely the situation Lawrence H. Summers predicted:

"I can't take something that's minimum wage because I just won't be able to pay my bills," he said. "I'd have to work three jobs to pay the bills, and that doesn't make sense."

Why shouldn't he work two or three jobs, at least for a while?  Wouldn't a prospective employer prefer someone who worked really hard to meet his obligations to someone who just sat back and collected?

For good reason: if he took a minimum-wage job, he'd no longer be unemployed, so his unemployment benefits would stop.  He might easily end up receiving less cash from working than he gets from not working, and have less job-hunting free time to boot.

Making do is not totally impossible.  One of my friends found himself unemployed for some months.  He collected scrap aluminum and sold it.  He picked up empty cans at 10 cents each.  He removed aluminum cylinder heads from the engine of an abandoned boat.

His neighbors made it clear that they didn't like living next to a junk collector, but he persevered and paid his bills without collecting a cent from the government! It's possible to scratch out a living as the illegals do almost anywhere in the country, but most Americans simply aren't willing to work that hard or in an unseemly way.

Another friend spent 4 to 6 hours per day working the phones and the Internet, then he took the first job that opened up.  The government will get back what it paid him, but it'll take a while.

Increasing Expectations

Part of the problem is that government lied when it called the program "unemployment insurance."  As with Social Security, which courts have ruled is a welfare program instead of insurance, people feel entitled to collect because they feel they've paid into the program.  True unemployment insurance, like true health insurance or fire insurance, is a good idea: it protects you from the full harm of an unpredictable catastrophic event, by allowing you to spread the cost out over time and the risk across many, many people.

Unfortunately, as Sen. Bunning hammered home, our government dumps general tax (or, worse, borrowed) money into unemployment benefits that were never paid for by "insurance" premiums.  There's no longer a connection between the premiums paid and the benefits received.

So what do you think?  Is it false compassion to make it possible for people to stay idle longer and get out of the habit of working?  Or should we add to the welfare rolls and to the deficit by extending unemployment benefits essentially forever?