Wednesday, April 20, 2011
Do Unemployment Benefits Cause Unemployment?
When you pay people not to work, not surprisingly, they don't work.
This is another posting which will cause people to say I am mean, cruel, and hard-hearted. But, if you think about it, when you pay people not to work, chances are, they will not work. And the idea of being "nice" to people by extending unemployment benefits has the side effect of preventing people from coming to realistic conclusions about their long-term job prospects and moving on with their lives.
What do I mean by this? Let me explain, using some real-world examples of people I know or have known over the years. The following are composites of these folks, and each does not represent a particular person.
1. Joe is a carpenter who worked building houses during the Real Estate Boom. Joe is quite familiar with unemployment benefits, as over the years he has worked in construction, he has been "laid off" and goes on "un-enjoyment" (as he calls it) for months at a time.
During a normal economy, Joe would milk his unemployment benefits during the construction off-season and make extra, under-the-table income by doing side jobs for homeowners on a cash basis. He ends up making more this way, as the unreported income is untaxed. And there are plenty of homeowners who want a new closet organizer installed or a bathroom remodeled (without a permit) or whatever, that Joe makes good money doing this.
And the only reason he doesn't do that kind of work full-time, is that he knows he will be re-hired in the Spring by Jolly Brothers Home Builders, to work on the Inlet Cove Meadows Mews Estates subdivision, where all the new mini-mansions are going up. And the Jolly Brothers pay his health insurance and provide a 401(k).
So it makes more sense to work the system the way he has been - using unemployment and under-the-table jobs as an ancillary income to seasonal construction work, rather than starting his own carpentry business.
And if you ask the Jolly Brothers, they will tell you their unemployment insurance premiums are staggering - as most of their employees collect on the benefits at least once a year. But to them, it is just the cost of doing business - and business is brisk. Or it was, until about 2008.
In 2008, the market started to tank, and the Jolly Brothers unloaded their last homes under construction and laid everyone off. They are still in business, but business is very slow and they are laying low until it turns around. And this means Joe hasn't been called back for over a year now.
And Joe is doing his usual deal - collecting "un-enjoyment" and working side jobs. He really isn't unemployed, and if his "un-enjoyment" benefits ran out, he might be forced to make a go of his carpentry business as a full-time gig.
But of course, one problem for Joe is that to work as a carpenter means he is competing with other carpenters who are collecting "un-enjoyment" and working under-the-table with no overhead costs, which means that he would have some unfair competition. So, for as long as the "un-enjoyment" holds out, he'll do as his friends are doing, and work illegally.
(By the way, think about that phrase for a moment, "Working Illegally". Only in America could labor be viewed as something illegal!)
The situation with Joe illustrates how government actions - even actions designed to be humanitarian and helpful - end up skewing markets and causing unexpected results. Joe's economic behavior is skewed by the presence of the free money of unemployment benefits.
2. Fred is 55 years old and a Human Resources Manager for a Law Firm. Or at least he was. During the recession of 2009, the unthinkable happened - his law firm went bankrupt, and he lost his job. 10 years before retirement, Fred has found himself in a bit of a pickle.
You see, jobs like Fred's don't require a lot of skill or education, and there are plenty of "qualified" candidates out there that are nearly half Fred's age and willing to work for half his salary. And not only that, their medical insurance costs are 1/4 that of Fred's.
In terms of economic marketing in our free-market economy, Fred is past his "sell-by" date. And yea, that sucks, and it is unfair and everything else. But get over it. Getting paid $100,000 a year to hand out pamphlets to employees explaining their health care and 401(k) benefits makes little sense. A website can do that.
So Fred sits home, depressed, and collects unemployment. He looks for jobs, polishing up his resume. And the jobs he looks for are like the job he left - high pay, a nice office, wear a suit every day to work. And not surprisingly, he isn't getting any offers.
And Fred's case is typical of middle-management people in their 50's today. As I noted before in this blog, my Father was laid off this way at age 55 back in 1980, during the last recession. And he went through the same deal - no one was hiring, and no one was hiring people in their 50's.
And this is to be expected and you should count on this happening instead of counting on a retirement party at age 65 and a Gold Watch, because the latter ain't gonna happen - or the odds are very slim that it will.
So what happens to the Fred's of the world? Well, if they were smart, they put aside money for retirement and thus don't have to worry about retirement. And if they were smart, at this stage in their life, they are relatively debt-free, or can become so by selling off junk in their lives and downsizing.
And all they need to do is find a job to support themselves - to make enough money to live on until retirement - and they will be all set.
But the big problem for the Fred's of the world isn't financial, it is psychological. Fred needs to realize that the big-money job isn't coming back and he will have to look into "Plan B" shortly. And "Plan B" means taking a job that pays a lot less than his "status" job did - and has less status as well.
And it is a very, very hard transition to go through. It is very easy to make more money over the years - and spend more. It is painful to make less and spend less. And swallowing your pride and realizing that you are not your job, you are not your credit rating, you are not your debts, you are not your car, your house, your bank account or any of the material things we tend to believe are indicia of our self-worth, is staggeringly difficult.
And yes, some of the Freds of this world can't deal with that, and then do something stupid like jump off a bridge. "All for a little bit of money".
And of course, one thing that will force Fred to deal with his situation is economic circumstance. It is the kick in the pants he needs to get him off the couch and into that second career, even if it pays 1/2 of his previous salary.
But so long as the politicians pander to our need to be "nice" by extending unemployment benefits, Fred will sit on the couch, watching daytime TeeVee and getting more and more depressed.
Sometimes, what people need isn't so much a shoulder to cry on as a kick in the pants.
3. Sam worked a union job at the local factory making $30 a hour. Sam was grossly overpaid, of course, as getting $60,000 a year for totally unskilled labor is nothing short of scandalous. In the non-union labor market his labor is valued at 1/2 to 1/3 that amount.
And not surprisingly, the factory has closed down. Faced with staggering labor costs, it couldn't compete even with other companies in the USA, much less China. And as the company lost market share, it laid off more and more people, to the point where there were two retirees drawing pensions from the company, for every one person still working there. This death spiral continued until the plant finally imploded.
Sam is sure those high-paying union jobs are coming back "any day now" - but the truth is, the union movement is not what it once was. Yes, they are making progress, and perhaps one day they will unionize Wal-Mart (I'm not holding my breath on that one). But the glory days of the 1960's and 1970's are gone for good, and union jobs are now a small slice of the overall employment picture.
Like Joe the carpenter, Sam is all-too-familiar with "un-enjoyment" as the restrictive union rules at the factory meant that Sam spent a lot of time on it. "Last Hired, First Fired" is the union's motto. And so Sam, as a young man, was usually the first to be laid off, usually seasonally, as the company's labor needs expanded or shrank.
(If Sam's wages and benefits were not so staggering, it is possible the company may have kept him on during those slack periods. But at $30 an hour plus bennies, he became an overhead expense, not a valued employee, and management had to cut him out of the loop the moment the plant went idle. Restrictive Union work rules meant that the company could not even put him to work maintaining the plant during slack periods or doing other jobs. So ironically, when the plant was idle, the company would send Sam home, and then hire outside contractors to paint the plant! Layoffs became a way of life).
In the typical Union plant like this, a young man with no experience might get hired out of high school, at age 18, provided they had an Uncle or Cousin in the union. They might work for a few months and get laid off for a couple of years. Since they have to be "on call" to be re-hired, they can only work odd jobs and wait for the Union to call them.
As they get older, they get hired on for longer and longer periods and laid off less and less, until their seniority is such that they are hired on full-time. At that point, they are in the "Country Club" and do little work - most real work being done by the younger people who have to "pay their dues" and get laid off constantly.
It was a nice system, for the two decades it lasted. But that sort of inefficiency in the labor market is gone for good (let's hope, anyway, it was wasteful to the people involved as it was to management).
But Sam is caught like a deer-in-the-headlights, and like Fred, cannot envision any other type of employment. And the local prevailing wages for unskilled labor are a bit of a shock to Sam. No one wants to hire a 55-year-old laid-off factory worker like Sam - particularly a Union guy who is likely to spend more time on coffee break than actually working.
So like Fred, Sam sits in front of the TeeVee and collects his unemployment and waits for the Union to call. The desire to work and the ability to work have been beaten out of him by the Union over the last two decades. Unless someone comes up and offers him a high-paying job on a silver platter, chances are, Sam ain't going back to work.
And extending unemployment benefits is just enabling Sam to avoid dealing with the changes in his life.
* * *
So what happens to Joe, Fred, and Sam? Well, I am pleased to report that they didn't jump off bridges or anything stupid. But they did go back to work - eventually - but for far less pay than they did before.
Joe finally opened his own carpentry and handyman business, obtaining a contractor's license and permits and reporting his income - or at least most of it. He does odd jobs for homeowners and makes some good money. While it is not as lucrative as his years with the Jolly Brothers Home Builders, he is at least supporting himself. His biggest issue is health insurance, which even with a high deductible, is pretty expensive. He thinks about expanding his business and hiring an assistant, but the government regulations involved in becoming an employer are so staggering that Joe gives up that idea. But Joe starts to understand why there are "no jobs" out there. When you make it hard to hire people, people don't get hired.
Fred is working in retail, and the pay isn't that good. But they do provide him with medical benefits, which are staggeringly expensive to buy on the open market. He did put a lot of money away in his 401(k) when he was working at the status job, so he feels comfortable about his retirement. He downsized his life, selling off the trophy house and moving into a smaller home. With the kids gone, he didn't need that house, anyway. He is comfortable and happy to be working again. Being on unemployment, in retrospect, was one of the worst times in his life - depressing.
Sam finally found out that he did have a marketable skill after all. He works as a bartender at a friend's pub. Again, the pay ain't great, but it gets him out and he makes enough money to get by and the tips are largely unreported income. He only wishes that during the years he worked at the factory that he put more money aside and spent less on gasoline-powered toys. The company transferred their pension plan to the Union, and barring any mishaps, he should be able to collect a small pension, which, with Social Security, will assure him of a comfortable, if not extravagant, retirement.
All three of these guys are doing OK, but clearly not doing as well as they were before. Is this "fair"? Perhaps not. You could argue the politics of it all day long until you are blue in the face - it isn't going to get you off the couch and back into life.
Some Liberals will no doubt argue that if we had restrictive trade tariffs and stronger Unions, these fellows would still be working. But I am not sure if that is true. The home construction market went beserk and tanked, and Joe's abuse of "unenjoyment" went on for decades. When we create social welfare entitlement programs, they have a distorting effect in the marketplace, as evidenced by Joe's pattern of work.
And one of these distortions is Americans' inability to save money. One reason that I hear from many working-class people as to why they don't save (but instead spend on jet skiiis and Harleys, all bought on time) is that "Well, if I lose my job, I can always go on unemployment!"
In other words, people factor this into their personal financial situation. The availability of free money is a disincentive to save and an incentive to consume.
Joe, Fred, and Sam all say the same thing today - that they wished that they had saved more and spent less. They spent as much money as they made - increasing their spending as their incomes increased. They bought increasingly expensive and fancy cars as they made more - and moved to larger and fancier homes. They felt they "deserved" these things, as they had worked hard over the years.
But the one thing they didn't do was to put money aside - build wealth of their own. So they were continually dependent on a "job" being there to pay all the bills. When the job went away, it pulled the rug out from under them.
If you are young and have a good job, don't make the same mistake that Joe, Fred, and Sam made. Put money aside - count on being laid off at age 55 - because it likely will happen to you. If it doesn't, then great. But you need to make plans for contingencies rather than just blithely assume it will all work out fine in the end.
My personal situation is not too unlike Joe, Fred, and Sam, except that I am self-employed, as as an "evil capitalist running-dog" I do not qualify for unemployment. And in my life, I have never collected unemployment, not one penny.
And as such, when I did lose a job, I was forced to pound the pavement and take a job - any job - to make money. And as a result, I have always worked, sometimes at some pretty odious jobs, such as cleaning toilets.
And as a result of not having a "safety net" to fall back on, I've had to save money to build my own safety net. And no, I don't make a big pile of money being self-employed. By the time I get done paying for my own health insurance and paying my "self-employment tax", I end up making less than an unskilled factory worker like Sam.
And is that "fair" - after years of education and hard work to end up making less than some schmuck working an assembly line? Perhaps not, but again, railing about the "unfairness of it all" rarely results in an improvement for your personal bottom line - as I have noted.
But it might help you understand why I don't feel too sorry for Sam, Joe, or Fred - people who all had good paying jobs, but never appreciated how lucky they were, never saved, always spent, and now are whining that the government should bail them out - at my expense.
But I digress....
The problem for me is that as a self-employed person, I can be "laid off" at a moment's notice, and business can go South in a heartbeat. You are only as good as your next client, and that's only if the client pays you - and oftentimes they do not, or do so only after months and months.
So the one advantage of self-employment is that, with the Wolves constantly at the door, you realize that you have to take care of yourself, so you do.
On the other hand, if you have a "Job", you are coddled into thinking that the company or the government will "take care of you" and it is a rude awakening when that doesn't pan out.
There are a number of jobs available today that are going unfilled, because of a lack of qualified applicants. Yes, many of these jobs don't pay superstar salaries, and one reason no one is applying for them, is that they think they can "do better" by holding out. And as unemployment benefits keep being extended and extended and extended, the people collecting these benefits have no incentive to take such jobs.
I believe a similar thing happened during the early 1980's. Unemployment was high, and unemployment benefits were extended again and again. It was only when they ran out that people bit the bullet and took those jobs that they thought they were "too good for" and moved on with their life.
My Prediction is that when unemployment benefits are allowed to expire (and not extended continually) you will see unemployment drop.
Because it is a very simple equation - when you pay people not to work, they won't work.
That may sound "harsh" but it is the reality of it.
And life is harsh. Get over that!