Sunday, January 12, 2014

Alternative Ways of Thinking About Unemployment Benefits

In the debate on extending unemployment benefits, a standard conservative argument is that providing these benefits to the unemployed discourages them from seeking and taking available jobs. The benefits replace labor market income with government assistance and serve as a disincentive to work. Therefore, if you cut the benefits, people will have a greater incentive to find a job and not depend upon the government. There are a lot of ways to mount a critique of this position. The most obvious is that labor market supply does not create its own demand, and there are currently three workers seeking employment for every available job.

But I would like to propose an alternative way to think about the problem that operates at the microeconomic level of incentives/disincentives. Rather than focusing on the disincentives attached to government assistance that presumably impacts labor market supply, how about the disincentives on the demand side of the labor market. More specifically, one of the most significant disincentives to work is the existence and preponderance of low paying insecure jobs that are generally undesirable. Employing the glorified rational self-interested model of microeconomics, workers would be acting as rational utility maximizers if they accepted government assistance rather than subject themselves to the economic deprivation and exploitation of the labor market. The policy implication from this alternative perspective involves raising wages and providing more secure forms of economic livelihood. This is where the economic policy proposals should be aimed, especially if one is concerned about poverty and inequality.

Note that the alternative approach advanced here accepts the assumptions of the neoclassical microeconomic model of rational calculation of costs and benefits, incentives and disincentives. Neoclassical economists use these assumptions when they apologize for the lack of capital investment by arguing that a rational capitalist should not invest their money if they do not anticipate a sufficient return on that investment. Well, if that is the case for the capitalist, why is it not also the case for the worker; why should a worker accept a job at a high cost and a low benefit?

This question can be answered in several ways. First, if one has no alternative source of economic survival they will take the crappy job. Second -- and this is where sociology (economic sociology) makes a major corrective to the neoclassical microeconomic model -- there are social norms in our society that value and encourage paid employment over government assistance. These norms often and routinely override the rational self-interest of the microeconomic model.

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