Increased Unemployment Benefits Can Be a Win Win

In our present-day societies, which neglect to guarantee either full employment or an unconditional income, unemployment benefits are a necessary safety net. Having evolved an economic system in which most of us must offer to work for a wage or salary to get by, majorities routinely vote for politicians who promise to make this impossible for a sizable portion of the workforce at any given time. Despite the current necessity for unemployment benefits, prevailing attitudes toward the policy seem largely hostile. Opposition does not solely – or even mainly – come from the powerful and wealthy. Many members of the working class (who, at least until recently, have deluded themselves into imagining they are “middle class”) appear to be hostile to benefit payments as well. They are hostile, that is, until they themselves need them, in which case their new-found altruism lasts for about as long as their jobless episode. A recent study* indicating that winning the lottery significantly influences winners’ political views, with one-fifth converting to conservatism pronto, may partly explain the prevalence of what is clearly intended to be self-interested behavior. The operative word is “intended”. Such people are trying to look out for number one, yet are mostly too clueless even to pull that off.

The truth is, when the economy is operating below full employment and most production plants have unused capacity, the effect of an increase in benefit payments net of taxes is to boost employment. The first employment gains are typically enjoyed by workers already in jobs whose hours are less than they desire. Workers, under these circumstances, do not “pay for” unemployment benefits, and some will gain as a result of them. The likely worst-case scenario for an individual worker is no effect on their personal circumstances other than the disappointment that comes from knowing a fellow human being won’t starve. The unemployed might still be deprived of self-esteem and experience family breakup, but it won’t compensate for the knowledge of their continued survival.

To work through the effects of an increase in transfer payments, suppose the government gave each unemployed worker an extra dollar amount each week. Most benefit recipients will not be in a position to save, so most of this extra transfer payment will be spent on consumption items. Pensioners will probably be appalled when they learn of the policy on whatever brainless current affairs TV show tops the ratings in their particular city, so, what the heck, let’s suppose the government gives them the same extra dollar amount each week as well, to appease them. The unemployed won’t like it, until they hit retirement age, but screw ’em. As with benefit recipients, pensioners won’t save much of the transfer either and so are likely to lift their consumption spending. The initial impact of the policy changes will be to boost consumption expenditure by the greater part of the additional transfer payments.

The way our present economic system works, the income spent by benefit recipients or pensioners (or workers, for that matter) mostly goes to businesses. They retain some sales revenue as profit and outlay the rest on wages, interest payments, rent for facilities and so on. In aggregate, transfer payments add to realized profit. The extra sales and profit justify an expansion of production.

Enterprises with spare capacity can respond to the extra demand by working plant and machines longer and more intensively than before. This enables them to meet the extra demand more or less at stable prices. Amid unemployment and idle capacity, competition makes it dangerous to raise prices sharply without good (supply-side) reason. Doing so could result in a loss in market share to competitors.

Since many workers already in jobs are keen for extra working hours, and these workers are already proven performers, they will tend to be the safest and first option taken by employers when expanding employment. Consequently, as already noted, employed workers will typically enjoy the first of the employment gains.

Workers with extended working hours will now possess higher income than before. They will save some of it and spend some of it on consumption items, the additional spending forming part of a ‘multiplier’ process initiated by the increase in transfer payments. On each round of the multiplier process, extra spending adds to income that, in turn, leads to still further spending. The additional increment in spending shrinks each round due to leakage to saving, taxes and imports. Because of this, the economy (absent other new influences) will tend to stabilize, eventually, at a higher level of income and employment.

The process, though, still has a way to go. The persistently stronger demand may lead not only to longer hours for those already in jobs but, once this spare reserve is largely exhausted, new jobs for those currently unemployed. As a result, some of the currently unemployed will not only dodge starvation but end up with a job as well.

If the stronger spending continues, a growing number of businesses might even find themselves operating near full capacity and begin to contemplate new investment to expand their operations and keep one step ahead of competitors. That would call for an expansion of employment in the investment-goods sector as well and set off a fresh multiplier process. Workers producing investment goods would receive extra wage income. Their higher consumption expenditure would encourage a still further expansion of production, income and employment in consumption-goods industries and so on.

In this way, the benefits of an initial increase in transfer payments net of taxes can be expected to spread through the economy. There is no need, after all, to starve the unemployed or leave pensioners to die quietly in the corner. There is no need to limit our working hours below the levels we desire. Nor is there any place for noble suffering (of others) or virtuous austerity (for others) or, if we’re not careful, much opportunity for schadenfreude.

No wonder transfer payments are opposed so bitterly!

* Hat tip to Tom Hickey, here and here, for both links provided in the opening paragraph of this post.

 
Related Posts

The multiplier process described above was initiated by an increase in transfer payments. Similar processes can be initiated by an increase in autonomous expenditures such as private investment, government spending, export spending or autonomous consumption. The way in which demand effects can sequentially work their way through the investment-goods and consumption-goods sectors, impacting on income and employment, is discussed more formally in:

Some Intuition on the Profit Equation, Courtesy of Kalecki

In-depth treatments of the multiplier process described above are provided in:

Planned Investment/Saving and Keynesian Causation
Graphical Representation of the Income-Expenditure Model

 

25 thoughts on “Increased Unemployment Benefits Can Be a Win Win

  1. The BIG portion of your JIG proposal could help the 88% or so of the unemployed who currently do not receive unemployment benefits. A means-tested BIG would act as an automatic stabilizer, increasing the deficit during recessions. During a boom, job openings would lure people off the BIG and into the workforce, decreasing the deficit.

    Only 25% of the *officially* unemployed currently receive unemployment benefits. I figure the real number of unemployed is roughly double the official number, hence 12% of the actual unemployed receive benefits. http://research.stlouisfed.org/fred2/graph/?g=sdl&dbeta=1

    So if those other 88% of the unemployed suddenly started receiving a weekly BIG check, that would kick the economy into gear.

  2. “The BIG portion of your JIG proposal could help the 88% or so of the unemployed who currently do not receive unemployment benefits.”

    In the US.

    The rest of the world is less sick.

    ‘Means tested BIG’ is unemployment benefit and tax credits. We already have them in the UK and they don’t work. They don’t work because the resentment of others stops them working. They can’t be high enough. They can’t be a choice. They don’t discipline the corporate sector. They distort the low end tax system.

    We can engineer airplanes to do near 90 degree turns instantly in the air. But if we do that then it turns the pilot into chunky salsa *because the system is fundamentally incompatible with the way a human works*.

    You have to design a fiat injection system that fits with the way *current people* see the world, or you will get nowhere.

    Remember that 50 years ago we were chemically castrating homosexual men. These days they can get married and nobody thinks anything of it. But social evolution is slow – particularly in the United States.

  3. Yet we’re the ones communicating over the Internet and the chimps are in the zoo.

    So there’s got to be something in this reciprocation lark.

  4. Tom: Thanks for the link. Looks like there’s a bit of room for non-inflationary demand expansion!

    Dan: Yes, agreed. Similar multiplier effects will apply to any transfer payments, with the size of the multiplier varying depending on the income profile of the recipients due to different propensities to consume and patterns of consumption. Generally, if the multiplier on expenditures (e.g. on a job guarantee) is on average k, the multiplier on transfer payments will be ck, where c is the marginal propensity to consume (fraction between zero and one). But transfers or expenditures targeted at lower income households will usually have bigger multipliers.

    Neil: Regarding perceptions and prevailing attitudes, I’m somewhat more optimistic about the appeal of a BIG relative to a JG than you appear to be, which is not to say I am particularly optimistic about either. The BIG and JG both attract hostility. Plenty of people hate the idea of others receiving an unconditional income. But plenty of people also hate the idea of them receiving even more (full wage and benefits) for doing what they consider wasteful make work. Why would people with such a mindset (maybe they are 3 year olds?) support a BIG or JG when they can support ever stingier “work for the dole” schemes instead? At the same time, I think it is too strong to say unemployment benefits “don’t work”. They have the demand effects discussed in the post and prevent more extreme deprivation. Undoubtedly a JG (and in my view also a BIG) would be an advance on unemployment benefits, but right now it seems just as likely that we’ll end up with no unemployment benefits and something worse, not better.

  5. Actually, I was being sarcastic in that chimps follow the rationality principle in maximizing utility iaw self-interest rather than sharing, as Ayn Rand says they should and conventional economists presume they do, whereas very young children share collaboratively gained resources. Of course, many children eventually dump that “irrational” behavior of sharing collaborative gains, like owners and top managers taking as much of the pie as they can cut for themselves. Studies show that this is especially true after taking an econ course and discovering what “rational” behavior is. Then it becomes one’s social responsibly to be guided by the invisible hand of self-interest.

  6. “Then it becomes one’s social responsibly to be guided by the invisible hand of self-interest.”

    This, I take it, is what Lloyd Blankfein meant about “doing God’s work.”

  7. “But plenty of people also hate the idea of them receiving even more (full wage and benefits) for doing what they consider wasteful make work. ”

    Yes. So you don’t do that.

    One of the principles of the Job Guarantee is that the work that is done has to pass the ‘socially acceptable’ test on a local basis – based upon the social maturity of the society in which it is introduced. You have to avoid that ‘something for nothing’ feeling at all costs.

    The work that is on offer has to been seen as reasonable for the wage paid, and of course the fact that the job is open to all means that people can always take the same job if they think it is a ‘cushy number’.

    The Job Guarantee is going to have to sell itself though and constantly highlight what it is achieving for the public good. Otherwise it will go the same way as the implicit job guarantee in the public sector that was put in place as part of the post war settlement. The neo-con efficiency line put paid to that.

    The polls are very clear on this. People want other people to work, not receive money for nothing. That’s the evidence on the ground.

    Plus of course there are heavily documented social benefits to working. And many people do need to be told what to do – because that’s the way they are.

    “At the same time, I think it is too strong to say unemployment benefits “don’t work”.”

    They work in an economic sense – in that they will easily counter-stabilise an economy. They don’t work in a political sense over time in that they are agitated to be reduced in size – which is counter-productive of course – and then restricted and finally removed. All resentment driven. That’s what I was getting at.

    It’s the same with state pensions where the age is going up, when the level of unemployment says it should be coming down.

    In the UK we’ve just introduced a restriction on child benefit for ‘higher earners’ – because they “don’t need it”. If we can’t keep in place a £20 per week universal payment for a child, how the devil are we going to keep in place a full wage for a millionaire?

    We need a Job Guarantee with as wide a definition of ‘work’ as possible, but work will still not be ‘anything you want’. We need a Job Guarantee where the exemption to work due to age, infirmity or other responsibility is as much as people will tolerate, but that’s not going to be everyone.

    And then hopefully over time society will evolve.

  8. “Actually, I was being sarcastic”

    Sorry Tom, missed that. I’ve responded to so much rubbish analysis today (elsewhere of course) that it has obviously damaged my radar.

  9. All good insights on how to design and gain support for a JG, Neil, but I would argue that a few of these points either apply to a BIG or can be turned back on a JG.

    The work that is on offer has to been seen as reasonable for the wage paid, and of course the fact that the job is open to all means that people can always take the same job if they think it is a ‘cushy number’.

    The latter part of this passage also applies to the BIG. If people think it’s so cushy not having a paid job, they can take the same, lower-income option.

    I think part of what needs to be challenged in people’s perceptions is the notion that there is a strong validity to the current distribution of employment and pay in the regular economy. “Productiveness” as evaluated by markets reflects income distribution, because what is produced, and hence the employment that occurs, is determined by demand patterns shaped by distribution. Unless there is something sacrosanct about the prevailing distribution, there is nothing sacrosanct about pay, conditions and the type of employment generated in markets. In my view, the idea that employment and pay in the regular economy reflect productiveness needs to be challenged. This is true whether we are arguing for a JG or a BIG.

    Plus of course there are heavily documented social benefits to working. And many people do need to be told what to do – because that’s the way they are.

    In a JIG, people who want a job would be guaranteed one, just as in a JG.

    They [unemployment benefits] don’t work in a political sense over time in that they are agitated to be reduced in size – which is counter-productive of course – and then restricted and finally removed. All resentment driven. That’s what I was getting at.

    Well, as you mention, unemployment benefits have survived longer than the implicit employer-of-last resort function. It remains to be seen whether the next incarnation of the ELR will have more staying power.

    I also tend to think you are somewhat overstating the political appeal of a JG:

    The polls are very clear on this. People want other people to work, not receive money for nothing. That’s the evidence on the ground.

    I agree there appears to be relatively more support for “work for the dole” than unconditional benefits but I don’t think it is clear that people want the poor to receive an income at all, irrespective of whether they are willing to work for it or not. At the same time, their actions suggest they are perfectly happy for a large percentage of income to go to wealthy people not working for it, or at least that they are not sufficiently motivated (not even close to sufficiently motivated) to put an end to the situation.

    With this in mind, I think one way to make a BIG (or social dividend) more palatable is to bring out the extent to which real income is currently unearned and also not entirely the result of labor but also technology or nature, and so really should, to some extent, be distributed to all.

    I think another point BIG proponents are right to emphasize is that labor-force participation is only going to become less necessary over time due to productivity improvements and mechanization. I expect as more and more people lose their jobs to mechanization and find them replaced with low-paid jobs, their self interest and jealousy of those still in high-paid jobs will tend to make them more receptive to a BIG or social dividend. Whereas selfishness and resentment currently make some workers hostile to UB, BIG or JG, the effects of mechanization on their jobs may alter their “views” and “morality” over time.

    None of that is to deny the resentment factor with a BIG that you have highlighted and the challenges this poses for framing a BIG, or the relative marketing advantage a JG has in this particular respect. Also, to be clear for others who may be reading, none of what I’ve written above should be interpreted as a criticism of a JG, which I of course support, with or without a BIG. It’s just a JIG is my most favored option.

  10. People share when they are content. When there is a hole inside of them its a free-for-all! That’s the sorry state of the world ….

    What makes a human being truly content?

    When a human is content, they are ethical, kind, compassionate – thoughtful by nature. So there are two natures at work here and both inside of us. So there is a choice.

    Wisdom chooses contentment! Knowledge shows how. Underlying all is a thirst, an understanding and commitment.

    The heart wants to feel!

  11. “If people think it’s so cushy not having a paid job, they can take the same, lower-income option.”

    That’s not the same is it. And it has been shown not to hold. The people who resent ‘shirkers’ most are those on exactly the same benefit. They see themselves as worthy, but others as swinging the lead.

    Much more difficult to take that view *and convince others* when they are actually working at doing something that has been sanctioned by the local group.

  12. Apologies for the fragmentation here. Doing this in and amongst.

    “In my view, the idea that employment and pay in the regular economy reflect productiveness needs to be challenged. ”

    Completely agree with that, but that is not a day one proposition. First you have to get something in.

    I agree also that the JIG is the way to go. I just don’t think at this point in time you will be able to choose the income option. That has to be allocated based upon the judgement of others (based upon society accepted norms of age and infirmity).

    If others perceive you as being capable of work then you will have to take a job. That’s where we are.

    I think we can get a choice of job accepted, and removal of any compulsion to take a job somebody else has allocated (i.e. you get to select from a menu rather than being forced to eat the ‘dish of the day’). In that I’m further along the line than the proposals that the UK Labour Party has proposed for the next election (which is compulsory acceptance of an allocated job at a private sector company – I don’t like that at all).

    “I think another point BIG proponents are right to emphasize is that labor-force participation is only going to become less necessary over time”

    JG proponents say the same thing. Randy is always going on about it. Ultimately we will all be on the JG, and the JG will be uprated over time (with the necessary redistributive taxation if the distribution curve remains as skewed as it is at present) until we get the equality of income distribution that people are comfortable with.

    That requires that over time the definition of ‘work’ gets less and less constrained until it encompasses the sum of human activities.

    E.G. It’s always amused me that when a child is born giving money to the parent to look after the child is seen as unacceptable. (‘you shouldn’t have them if you can’t afford them’), but if the child is handed over to somebody else, and they are paid, then that is acceptable. The job of work of looking after and raising a child is created when the child is born. Quite why one person should be paid and not another for doing that job is one of those irrational social quirks.

    Getting that job under the auspices of a JG is going to be a tough sell – even though it is fundamental to the future of any society.

    Hopefully over time we’ll have corrected the school system so that it brings up a new generation of people with a more progressive view of human activities.

  13. One further thing. A full blown BiG cripples one half of your auto-stabilisers, which means that you have to hike taxes on the other side to compensate (or you’ll overspend the economy). The tax comes in at something like 50% or so as an income tax rate. (Calculation in http://classonline.org.uk/docs/2013_Policy_Paper_-_Richard_Murphy__Howard_Reed_%28Social_State_-_Idleness.pdf)

    Those taxes fall on those doing ‘proper jobs’ – increasing the level of resentment against those who are seen as refusing to participate.

    You don’t get that with a JG. Like unemployment benefit, it stops being paid when the individual transitions from the JG into another job.

  14. Good analysis. Agree that a JG could be an effective mechanism for broadening the societal definition of productive roles over time, as long as we keep pushing for this process to continue, and that the JG pay could rise progressively with productivity improvements and increased mechanization, alongside the broadening of roles.

  15. Peter, your comments are disappearing (or teleporting) again. Or is it your intention to make it look like I’m talking to myself because THAT’S NEVER BEEN DONE BEFORE. For you:

    http://twitpic.com/e0b2hd

  16. Peterc, I look forward to a future blog of yours discussing the “social wage” aspects of the basic income part of your JIG. Something of a public policy floater came up that I would like to discuss.

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