[Revised] Don’t Fear the Reaper (of Unemployment Benefits)

So the GOP met today to discuss strategy for the upcoming House and Senate elections. I encourage you to read the whole piece; it’s full of hidden gems (“policies incentivizing people to work” may be one of my all-time favorite euphemisms). One of the things that people seemed to like was the implementation of “tough love tactics” (that one also immediately made the list). Call me European (no really, that’s okay; I am German, after all), but what are certain people afraid of when it comes to making sure everybody has a baseline income to fall back to? What’s so bad about indefinite unemployment insurance? Is everybody just going to stop working? Will total economic collapse ensue?

While I get that the “paying people to be unemployed won’t help the economy“-argument holds a lot of sway with a lot of people (horrible article, by the way), it’s quite frankly wrong. Let’s take a look at labor force participation rates around the ‘developed’ world (although if you really want high participation rates, look at who’s leading the charge in 2009-2013: Tanzania and Madagascar, both with rates above 89%. Now there’s some role-model labor market policies). The US makes its appearance in the lower middle of the pack, with a solid 63% participation rate. Sure, you scroll past countries such as Iceland, Norway and Sweden on your way there (at 74%, 66% and 64% respectively). These places all have a pretty decent welfare state, which doesn’t seem to make all their citizens want to stay at home, smooching and mooching their lives away. Also, take a look at their unemployment rates compared to the US:

Sure, there may be some measurement issues here, although a more generous welfare state will, if anything, mean that you’ll estimate a higher unemployment rate. That’s because everyone who receives benefits will be counted as unemployed, rather than some of them eventually just dropping out of the statistics as their benefits expire. And even allowing for some measurement error, these countries are, if anything, doing better than the US rather than worse.

But is this a fair comparison to begin with? I’ll grant you the benefit of the doubt and say these countries are much smaller than the US, Norway is extremely resource rich, they’re sparsely populated… let’s pretend they’re exceptions.

Moving on to some more “core” European states then. Now I won’t compare the US to countries that are still in recession, such as Spain or Greece. That’s a pointless frame of reference. Let’s take some of those that were fortunate enough – like the US – not to have to undergo completely crippling austerity. Germany comes to mind, so does Switzerland and the Netherlands. All three have more generous welfare states than the US, but look at how they stack up unemployment-wise:

Not doing so bad, are they? Granted, Germany’s labor force participation rate is three percentage points below the US. But Switzerland gets 68% of its working age population to apply themselves, and the Netherlands brings it in at a whopping 83%! Must be their socialist working spirit.

By the way, even countries that are still in recession and have substantially higher unemployment rates than the US at the moment still don’t do much worse for labor force participation. Portugal is at 61%, Ireland at 60%, Spain at 59%, and even Greece (Greece, I tell you!) is still at 53% (and those guys are currently at 27.8% unemployment). And these countries should be doing worse than the four mentioned above, if anything. Not only are they still in recession, not only should their own welfare states be providing incentives for people to stay off work, their citizens can also freely move to other countries and live there if they feel like it, whether to work or to collect benefits.

And sure, the US is set to spend a little under $530 billion on welfare. But that’s easily trumped by the roughly $830 billion it’s going to spend on defense! Even leaving aside veterans’ payments (funny how that’s not part of welfare spending, but I’ll go along with it), there’s still $626 that’s being spend on the US military, which is 39% of global military spending! So maybe, just maybe, unemployment benefits and the broader welfare state aren’t the costliest items on the menu here.

Now this was a blog post, not a formal economic analysis. And if you can show me a detailed economic analysis showing how providing for the unemployed is going to ruin the United States, I’ll take that into consideration. But I think it’s a little too simple to say that unemployment benefits = paying people to be unemployed = a really, really bad idea. And so far, I’ve only been trying to show that other countries, which have more extensive unemployment benefits, aren’t doing worse than the US. That’s not even making the argument that unemployment benefits are probably actually beneficial, especially in an economy operating below potential.

One thought on “[Revised] Don’t Fear the Reaper (of Unemployment Benefits)

  1. enjar

    Interesting article. Whenever this whether the UI elongated the recovery comes up, this graphs comes in my mind. http://data.bls.gov/generated_files/graphics/latest_numbers_LNS12300000_1948_2014_all_period_M01_data.gif
    That flat tail seems to be very odd phenomenon that was seen only during 60s.
    Of course, there are baby boomers are retiring these days. That is one factor for this flat employment to population ratio. But to me, there seems to be something different for this recovery in terms of benefits.

    I would recommend this Econtalk podcast with Casey Mulligan as a guest http://www.econtalk.org/archives/2012/12/mulligan_on_red.html
    I am not sure whether you have listened it before

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