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