Unemployment Benefits, Minimum Wages, and Incentives

President Obama, in calling on Congress to once again pass legislation for an “emergency” extension of unemployment benefits, thinks greater benefits will lead to more jobs. Man, that guy is confused.

The discipline of economics doesn’t agree on much, but it does agree on a few things. Among those: demand curves (generally) slope downward and supply curves (generally) slope upward. A corollary to those two items is the adage that taxing something means people make less of it available and subsidizing something means people make more of it available. In addition, opportunity costs matter. The application to unemployment benefits is straightforward: an extension of benefits - up to 99 weeks, or nearly two years - decreases the incentive to find a new job quickly. This is not because the unemployed are lazy, or not interested in full-time employment, but because the cost of being out of work for an extended period is lower, and therefore people are rationally willing to wait longer to find a job that meets their expectations, rather than take what’s available. At the same time, unemployment insurance is a cost largely borne by companies, so an extension of benefits makes firms less willing to hire.

Writing in National Review Online, Jillian Kay Melchior describes some of the perverse incentives of the laws involving receiving unemployment benefits:

Tired of being broke, I decided to amp up my efforts at freelance writing while I applied for jobs. It would bring in some extra income, and it would let me demonstrate to prospective employers that I had some personal hustle, that those gap months between jobs hadn’t been a total waste.

But unemployment makes freelancing complicated. According to the rules, “each day or part of a day of work will result in a payment of [only] a partial benefit.” If I worked one day, my unemployment payment would be only $303; two days meant only $202.50. If I earned more than $405 in a week, I got nothing. 

That made freelancing costly for me, regardless of how much I wanted to spend my time productively. Say I earned $75 in one day of freelance work. I would then receive $303 in unemployment that week, and my total weekly haul would be $378 — less than the $405 in standard unemployment. In other words, if I couldn’t earn more than $100 in a day, I’d actually be losing money by working.

The unemployment rules also subjected me to a bizarre work schedule, because they stipulate that “you are considered employed on any day when you perform any services — even an hour or less — in self-employment, on a freelance basis, or for someone else.” In other words, taking two days instead of one to do an assignment meant I’d lose an extra hundred bucks. As a result, I tried to pack all my freelance writing and pitching into a single weekday, pulling the sort of late nights I’d once hoped I had left behind in college.

Moreover, the tough penalties made me think twice about sending out pitches. After all, though it might help me find permanent work faster, the unemployment rules defined work as “any activity that brings in or may bring in income at any time” (my emphasis). Sending out pitches could arguably be classified as work, even if an editor turned me down. And all work had to be reported, or I would be behaving fraudulently — which my unemployment packet warned “can lead to severe penalties, including CRIMINAL PROSECUTION and imprisonment” (their emphasis). So if an editor accepted my pitch, but said so in an e-mail sent the next day, was replying to him “work,” and was I risking stiff penalties if I failed to report it?

Another oldie-but-goodie policy that Democrats are trotting out in an election year in an effort to distract from the debacle of the Obamacare rollout (and the slow-moving but more widespread debacle of Obamacare generally) is an increase in the minimum wage. Here, too, is another area of (near-)consensus among economists. As Walter Williams, in “Politics and Minimum Wage,” notes:

There's little debate among academic economists about the effect of minimum wages. University of California, Irvine economist David Neumark has examined more than 100 major academic studies on the minimum wage. He reports that 85 percent of the studies "find a negative employment effect on low-skilled workers." A 1976 American Economic Association survey found that 90 percent of its members agreed that increasing the minimum wage raises unemployment among young and unskilled workers. A 1990 survey reported in the American Economic Review (1992) found that 80 percent of economists agreed with the statement that increases in the minimum wage cause unemployment among the youth and low-skilled. If you're searching for a consensus in a field of study, most of the time you can examine the field's introductory and intermediate college textbooks. Economics textbooks that mention the minimum wage say that it increases unemployment for the least skilled worker. The only significant debate about the minimum wage is the magnitude of its effect. Some studies argue that a 10 percent increase in the minimum wage will cause a 1 percent increase in unemployment, whereas others predict a higher increase.

And the effects of minimum wage policies are not uniformly distributed. Williams again:

Minimum wages have their greatest unemployment impact on the least skilled worker. After all, who's going to pay a worker an hourly wage of $10 if that worker is so unfortunate as to have skills that enable him to produce only $5 worth of value per hour? Who are these workers? For the most part, they are low-skilled teens or young adults, most of whom are poorly educated blacks and Latinos. The unemployment statistics in our urban areas confirm this prediction, with teen unemployment rates as high as 50 percent.

Of course, as with any policy, there are winners to go along with the losers. People who actually keep minimum wage jobs are better off, but so are "Higher-skilled and union workers” who don’t have to compete as hard with lower-earning employees, as Williams notes. He points out that there is another category of winner:

Among other beneficiaries are manufacturers who produce substitutes for workers. A recent example of this is Wawa's experiment with customers using touch screens as substitutes for counter clerks. A customer at the convenience store selects his order from a touch screen. He takes a printed slip to the cashier to pay for it while it's being filled. I imagine that soon the customer's interaction with the cashier will be eliminated with a swipe of a credit card. Raising the minimum wage and other employment costs speeds up the automation process. I'm old enough to remember attendants at gasoline stations and theater ushers, who are virtually absent today. It's not because today's Americans like to smell gasoline fumes and stumble down the aisles in the dark to find their seat. The minimum wage law has eliminated such jobs.

Finally, Philip Klein in the Washington Examiner, observes: 

To put things in perspective, when Obama wanted to downplay the number of individuals who had received cancellation letters due to his health care law, he portrayed the 5 percent who obtained their health insurance through the individual market as representing a small segment of the population.
In comparison, 1.6 million Americans earned exactly the federal minimum wage in 2012, according to the Bureau of Labor Statistics, and another 2 million had wages below that due to certain exemptions. Combined, the 3.6 million earning at or below the minimum wage represented less than 3 percent of working Americans.

Well, anything to distract voters from other problems, even if, like so many Democratic proposals, many of the intended beneficiaries are actually victims.