David R. Henderson  

Concise Encyclopedia in the News

If I Had More Time... How Free Are Amish Women?...

Getting back from the APEE meetings in Las Vegas at midnight Tuesday, I didn't have time to read Tuesday's Wall Street Journal until this a.m. And there, in the top unsigned editorial (the Journal calls it "Review and Outlook"), was a piece that led with a quote from Larry Summers' article on unemployment insurance in the Encyclopedia. Here's the quote:

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.

The Journal does get one fact wrong: the book came out in 1993 as The Fortune Encyclopedia of Economics and in 2002 on-line as The Concise Encyclopedia of Economics.

The whole editorial is worth reading.

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CATEGORIES: Labor Market

COMMENTS (4 to date)
Kevin Donoghue writes:

"The bill pushed by Democrats would extend jobless payments to 99 weeks, or nearly two full years, at a cost of between $7 billion and $10 billion. As Mr. Summers suggests, rarely has there been a clearer case of false policy compassion."

Has Mr. Summers actually suggested that, or is the WSJ just lying again?

Tom West writes:

Of course, if you just beat everyone who is unemployed, the unemployment rate will drop as well. In other words, the unemployment rate is not the only metric to be used in such a case.

The point is that if you are operating in good faith, you must examine both the positive and negative aspects of such a policy.

Measure the alleviation of misery provided by the extended benefits versus the increase it causes in the unemployment rate, then decide.

But don't imply there is no upside (or just as bad, pretend there is no downside) to extending benefits.

Douglass Holmes writes:

There are at least two downsides to unemployment insurance as it now exists. The first, mentioned above, is that the unemployed have more freedom to take their time in finding work. The second is that companies and taxpayers have to pay into the unemployment fund. This increases the cost of employing people and thus reduces overall employment even in good times.
I sympathize with the desire to alleviate suffering, but in doing so, we should consider all the costs. Politicians rarely do this.

Anyway, the point of extending jobless benefits is to protect the jobs of the politicians.

spencer writes:

The other side of the equation is that unemployment insurance or reservation wage works to preserve the "CAPITAL" or embedded experience or knowledge an unemployed worker has.

If that worker is forced to take a lower payed job
that does not allow the worker to utilize the workers capital it is equivalent to going around and burning factories or other capital structures to the ground.

Do you really believe that destroying capital that is temporarily unused because of a recession makes society or the economy better off?

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