How Much Do Incentives Matter?

I think that there’s a kernel of truth in John Goodman’s op-ed at Forbes on the ways in which policies intended to help people who don’t have jobs may actually encourage them to stop looking:

A new book by University of Chicago economist Casey Mulligan explains that through a major expansion of the welfare state we are paying people not to work:

[I]n the matter of a few quarters of 2008 and 2009, new federal and state laws greatly enhanced the help given to the poor and unemployed — from expansion of food-stamp eligibility to enlargement of food-stamp benefits to payment of unemployment bonuses — sharply eroding (and, in some cases, fully eliminating) the incentives for workers to seek and retain jobs, and for employers to create jobs or avoid layoffs.

Mulligan gives the example of a two earner couple — each earning $600 a week. After the wife gets laid off she obtains a new job offer, paying $500 a week. But after deducting taxes and work related expenses her take home pay would be $257. Since untaxed unemployment benefits total $289, clearly she is better off not working.

All in all, Mulligan estimates that about half the precipitous 2007-2011 decline in the labor-force-participation rate and in hours worked can be blamed on easier eligibility rules for unemployment insurance, food stamps and housing aid.

I think that I would couch it differently: the jobs that are on offer don’t pay enough. Note, too, that the claim is that half the difference in labor force participation rates are due to policy rather than half the difference in unemployment rates.

He also cites the example of employers’ response to Obamacare of substituting part-time workers for full-time.

Economics is neither physics nor mathematics nor accounting although it may be informed by them. It is a science of human behavior and the sad reality is that humans respond to incentives and changes in behavior in response to incentives will inevitably be faster than compensatory changes in policy. Regulatory arbitrage, financial engineering that exploits the difference between regulatory policy and economic substance to avoid regulation or make money, is real and inevitable. The provisions in healthcare reform requiring employers to provide healthcare insurance to full-time employees or pay a fine has had the unexpected but foreseeable effect of reducing the number of full-time jobs which, I presume, will in turn cause the cost of the program to balloon past the estimates made when the plan was enacted.

I think that the estimate of the effect of policies intended to help the unemployed cited above is high. However, I do believe that the decline in labor force participation rate and the increase in the unemployment rate are the consequences of policy. Just not those policies. At least not those policies alone.

27 comments… add one

  • The provisions in healthcare reform requiring employers to provide healthcare insurance to full-time employees or pay a fine has had the unexpected but foreseeable effect of reducing the number of full-time jobs ….

    Funny!

  • Also, it’s news to me that unemployment compensation is untaxed.

  • Another aspect is that UEC varies by state. In Florida I got the maximum benefit, which came to $300 with the small federal add-on. That’s basically a full-time minimum wage job. Again, that was the max available in Florida. Lots of people didn’t get the max. It doesn’t take much loss of benefit before getting a job a McDonald’s isn’t an improvement over UEC.

    And I don’t see how extended UEC leads to a drop in participation rates. If you’re not at least making a nominal effort to find work, you don’t get paid. Perhaps people purely on food stamps and such don’t have an incentive to keep looking, but those on UEC do.

  • Oh, to answer the question at the top: Incentives to stay unemployed or to become employed matter a lot less than people with nice, cushy sinecures think it does. Especially when there aren’t enough jobs, and the elite of the nation insist on importing ever more people to compete for what’s here.

  • It may be taxable. Depends on total income and deductions like any other income.

    Here in Illinois unemployment compensation is not taxed by the state.

  • If it isn’t clear, I think that not enough jobs is the most important factor, followed by pay rates that are too low to make working worthwhile. I would like to see the policies on unemployment tilted more towards wage subsidies and I’d intended to include that in the post.

  • I would like to see the policies on unemployment tilted more towards wage subsidies and I’d intended to include that in the post.

    I would think that would be enough for a doctoral dissertation or two!

    And now, enough avoidance, and back to the toilet….

  • TastyBits

    20 million people are not on gov’t programs because they are deadbeats. There are some deadbeats, but they are a small minority. The increase in people “on the dole” is due to the crappy economy and housing issues. When these two items improve, people will take jobs.

    Philosophically, I do not support a “safety net”, but my philosophy keeps getting whacked by reality. I am scientifically oriented, and when my philosophy does not fit reality, I adjust my philosophy. I was once a rabid Rand Objectivist, and I would have considered Ron Paul to be socialist leaning. The reality is that life is infinitely more complicated than most people fathom.

    Gov’t programs, regulations, etc. have unintended consequences. Few ever achieve their goals, and many exacerbate the problem they are trying to solve. Others introduce a new set of problems. Most of the arguments from both sides have been reduced to slogans, and few of those spouting the slogans have a grasp of the subject.

    Long term welfare recipients have different issues, and a lot of gov’t assistance facilitates the ability to live in poverty. Many of these programs could be modified, but most of the modifiers have no connection with these folks. The War on Poverty and the War on Drugs has turned many of these communities into hellholes.

  • steve

    The Mulligan book and his ideas are pretty bad. Older studies looking at Europe supported the idea of a large effect on unemployment from UI. However, Europe pays a lot more, 100% of the lost wages in some cases, and pays for a lot longer under all conditions. Our UI pays, at best, 50% of lost wages and ours has been extended only during this stagnation. Newer studies put the effect at much lower rates. However, if Mulligan is correct, we should see all of those people going back to work since 99 weeks is over for most people.

    Mulligan also needs to figure out why we had low UE in 2007, but those same people are unwilling to work now. Since most of the UE is in the lower paying areas, I have a hard time buying his explanations. He should also be aware that most people are still making payments on their underwater homes. Not economically rational.

    “He also cites the example of employers’ response to Obamacare of substituting part-time workers for full-time.”

    How does that work if the penalties do not start until 2014. Half of the UE from 2007-2011 is due to a policy taking effect in 2014. A law passed in 2010? Prescience?

    Query- He says that employers had no incentive to create jobs because their employees could go on UI. How does that work? I am hiring, but it is not because I have some incentive to keep people off of UI.

    Final query- If we assume that workers are rational, in the economic sense, as Mulligan and Goodman claim, wouldnt they also be aware that being unemployed for any period of time risks long term unemployment and the potential for not being employable again? Wouldnt a rational worker opt to work at a slightly lower wage (that is what Mulligan offers as an example) in order to retain skills and future employability? It seems pretty clear to me that the rational worker would accept that job at $500, accept a temporary loss of $40 a week, and look for a better paying job while still employed.

    Steve

  • jan

    Good post TastyBits.

    I am a pull-yourself-by-the-bootstraps kind of person, with a long standing drive of ‘it’s up to you,’ in getting through life. However, having said that, there is a swathe of people who simply don’t have the resources, internal, external or sometimes both, to make it without assistance. How to set standards, in determining who really needs a safety net and who doesn’t, though, is increasingly more difficult to objectively accomplish, in lieu of our own changing cultural milieu regarding self-reliant lifestyles.

    Years ago, in a public health rotation, I encountered ‘generational’ welfare — people whose parents were welfare recipients and who quite naturally transitioned into welfare themselves, once they became adults. It was a revelation for me, at the time. However, today, it is much more of a common occurrence, aided and abetted by a greater public acceptance of being on the dole, which is now married to a larger embrace of a collectivism vs an individualistic society kind of structure. That’s where income redistribution has slithered into the conversation, riding on the rhetoric of ‘fair shares’ — placing more virtue on an egalitarian society versus one with greater freedom supported by an understood national work ethic.

    Essentially, working, to many, is no longer viewed in necessarily honorable terms, giving way to intellectually condoning, rather than condemning, a clever ‘gaming the system’ POV. When you couple such a changing mind set into the harsh realities of a slow economy, with few employment opportunities, it is a perfect storm for people to simply accept a new unemployment norm as being irreversible. Consequently, people revert from an upper mobility aspiration to one where simple existence is the new way of life — hanging on, but virtually going nowhere beyond.

    I think, if such a national mood becomes entrenched into the minds and spirit of the nation, it will be harder and harder, as more time goes on, to dislodge and move into a more productive mode. Hence, those relying on disability payments, UE benefits, food stamps, medicaid et. al., will continue to grow until the money runs out — similar to what is happening in Europe today.

    I believe this recent election proved that such a possibility is in the mix, as a greater majority of the people appeared to vote for the status quo rather than take a chance with someone who was at least promoting a new direction — growing the economy instead of people’s dependency on government.

  • steve

    ” However, today, it is much more of a common occurrence, aided and abetted by a greater public acceptance of being on the dole, ”

    Sigh. Have you actually looked at the numbers? After the welfare reform of the 90s, this changed. You really cant stay on welfare forever. Single and w/o kids is difficult to get on and stay on for very long.

    “Essentially, working, to many, is no longer viewed in necessarily honorable terms,”

    Evidence please. I will go first. In 2006 when jobs were available, granted as a result of a bubble but we are talking about the willingness to work, unemployment was very low. Your turn.

    Steve

  • jan

    How does that work if the penalties do not start until 2014. Half of the UE from 2007-2011 is due to a policy taking effect in 2014. A law passed in 2010? Prescience?

    Employers tend to be cautious people. They look far ahead to fathom the potholes ahead, making corrections ahead of time. That’s not prescience as much as it is prudent business behavior. It’s very much like a driver who slows down, or manually downshifts, before they hit the hairpin curve, rather than stomping on the breaks (wearing down the break pads) once they are in the curve.

    If we assume that workers are rational, in the economic sense, as Mulligan and Goodman claim, wouldnt they also be aware that being unemployed for any period of time risks long term unemployment and the potential for not being employable again?

    I’ve heard that self-discipline is a ‘learned’ behavior. It’s not something we are necessarily born with, nor wake up to, one fine morning. But, rather, it is a way of being that has to be first practiced, to become ingrained into our habits. Being ‘rational’ is kind of the same thing. We become rational by, processing the consequences of our own prior experiences, waving off ‘magical thinking’ options, and subjecting ourselves to weighing logical outcomes objectively. How many people do you know who automatically default to that kind of rational thinking?

    It’s like most students and homework — they wait until the very last minute to do it — many times burning the proverbial midnight oil. Unemployment benefits are treated the same way, by most people — they wait until the benefits have almost run out before facing the reality of putting food on the table by their own means.

    This is not a judgement. It’s simply the way of common human behavior. We adjust to our circumstances, only when we have to…..

    Wouldnt a rational worker opt to work at a slightly lower wage

    If that were the norm, then what happened with the Unions, their guidance and the closing down of Hostess, because of the refusal to entertain a lower wage?

  • jan

    After the welfare reform of the 90s, this changed.

    Obama has gutted welfare reform.

    The Obama administration is waiving the federal requirement that ensures a portion of able-bodied TANF recipients must engage in work activities. It is replacing that requirement with a standard that shows that the pre-reform welfare program was successful and the post-reform program a failure. If that is not gutting welfare reform, it is difficult to imagine what would be.

    I will go first. In 2006 when jobs were available, granted as a result of a bubble but we are talking about the willingness to work, unemployment was very low. Your turn.

    Here is one example associated with not only the lack of soft skills, but also indictive of a certain amount of job expectation rigidity in the current populace — especially in younger people.

    The average age of the American factory worker is 55 years old. The crunch is coming unless we turn around societal attitudes toward working with our hands and once again, find honor in the work itself, and not necessarily how much the worker is paid.

  • TastyBits

    @jan

    I have a problem with “pull oneself up by one’s bootstraps” theory is when one’s boots are stuck in a tar pit, and the War on Poverty and the War on Drugs has created a tar pit at the lower end of society. These are not helpless as the liberals think nor are they as lazy as the conservatives think.

    The gov’t puts up numerous roadblocks and speed bumps for those trying to start and run a small business. This thwarts many potential small business owners, and they remain in their comfort zone. The dynamic is the same at the bottom.

    If conservatives had a better understanding of life at the bottom, many of their views would change, but they would also be able to challenge liberal talking points.

    The US is not Europe, and it will take far longer than most people can imagine to get to that level. There are just too many factors working against that trend. The US attracts hard working people from other countries, and there is substantially more mobility in the US.

    Getting gov’t out the way would help, but power and money make that difficult.

  • jan

    TastyBits

    I have a problem with “pull oneself up by one’s bootstraps” theory

    That application is mainly for myself, which I have done a number of times. However, I think a person has to start somewhere, and the best place is usually within oneself. If that doesn’t work, it’s nice to have support on the outside, hence the safety net. But, if you have such a broad safety net, already in place, it can supplant any resources, overlooked, not tapped into or simply feared.

    That’s all I’m saying….

  • A girl after my own heart.

  • Hard to bootstrap when the economy continues to sink. I keep running into people losing their jobs, and it seems like almost everyone is worried about losing whatever job they’ve got.

    There just aren’t enough jobs for everyone that wants one, and it’s not really getting better.

    In the last two months a friend’s husband, a friend of my wife and my mother-in-law have all lost their jobs. The friend’s husband had been in commercial construction. He got called back up by his company after almost four years out of work last spring. (He had been briefly employed working for the BP Gulf oil spill clean up.) He got laid off about two months back – turns out the company didn’t have as much work as they thought. The other two lost jobs they’d had for the last twenty years.

    Those three examples are anecdotal. So are the new out-of-work professionals I meet each month through the networking group I work with. The houses that keep getting foreclosed on in my neighborhood are also anecdotal. But I keep seeing bad anecdotal evidence, never good anecdotal evidence.

    There aren’t enough jobs for everyone, hence boot-strapping just ain’t gonna cut it.

  • Ice, sounds like you need to begin thinking like a girl.

  • Or as I wrote elsewhere:

    What I need, and what the other LTUEs need, as well as the regular old UE, and the under-employed folks, is an economy that is growing strongly. We’re not going to get back in the game until and unless that happens. And the public has now endorsed the exact opposite of strong growth.

  • No. The wealthy have banked their wealth. They’re waiting to get better terms so they can screw you again, and harder.

  • Andy

    Well, I think there’s a combination of mutually reinforcing factors at work:

    1. Cost of employment has increased over time for both employers and employees.
    2. Not enough jobs – a general oversupply of labor
    3. Things that make it difficult to move where the jobs are – home ownership, dual-income families, credentialing, etc.

  • Besides, Janis, I’m just a stay-at-home dad these days. I’m more concerned for everyone else in deep shit.

  • Son, do what I told you.

  • Andy,

    Add to those that the return to capital has increased. Companies don’t stock inventory or have warehouses any more, just to mention a couple of explanations for that. The shipping container is the new warehouse.

    Investors have become accustomed to high returns with low risk. That disinclines them to making riskier investments that might actually build something or employ anybody. That works synergistically with the rising cost of employment.

  • steve

    “Obama has gutted welfare reform.”

    Untrue. I read the rulings in question. You should too. The elect is over, so it is time to start dealing with what things really say, and not the spin.

    “Employers tend to be cautious people.”

    I am an employer. I talk with small business people often. People arent deciding 4 years ahead of time. Your typical restaurant worker, just to use an example, turns over pretty fast.

    “It’s like most students and homework — they wait until the very last minute to do it — many times burning the proverbial midnight oil. Unemployment benefits are treated the same way, by most people — they wait until the benefits have almost run out before facing the reality of putting food on the table by their own means.”

    Nope. I know very few people who do not realize that you are more likely to get a job if you already have one. Again, when jobs were available, unemployment was low. We know people will work if they are available. Now, if you want to deny that people are rational when it comes to making economic decisions, then you blow up Mulligan’s explanation also. He claims that people are making a rational decision to make an extra $40/week. I am simply claiming that people want to work, and understand that being out of work hurts their chances of getting a better paying (or any) job.

    Steve

  • jan

    Steve,

    Using a disclaimer applied by you in a later post — I guess it depends on what your definition of ‘gut’ is. In the case of Obama’s EO interference of the TANF Act, it was another example of this president going around Congressional interaction to set the agenda he wants into place. Like his other unilateral presidential edicts, such as the temporary politically motivated DREAM Act, he seems to engage in pressing the envelop of his own powers to circumvent what most of us comfortably rely on —- the checks and balances of a publicly elected divided branch of government

    In the case of welfare reform, even the GAO confirmed that the Obama Administration overstepped their bounds in the changes that were made.

    The Obama administration’s efforts at extending executive authority was dealt a setback on Tuesday. The bipartisan Government Accountability Office flagged the administration’s end run around Congress in its July memo announcing changes to the Temporary Assistance for Needy Families (TANF) act, aka “welfare reform.”
    The GAO said that the White House needs to give Congress the chance to block its plan permitting states to tweak the work requirements needy families must satisfy in order to receive government assistance under the program.

    Perhaps, ‘gut’ is too dramatic of a word to use. But, the circumvention of Congress, a tool that Obama is tending to use since the 2010 midterms, is reality, not merely a talking point, to those of us not as enchanted with President Obama’s ideological direction, as you tend to be.

  • jan

    Employers do tend to be cautious people, when it comes to assessing the bottom profit line, which can effect future expansion and hiring guidelines — especially in the lower-paying service jobs, where the costliness of the ACA is more acutely felt.

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