Paying People Not To Work

To economists and the business-savvy elements of the public, the recent recession is history. But some who lost their jobs more than a year ago are still sitting at home — and getting paid to do so.

In 25 states workers are able to collect unemployment benefits for 99 weeks, thanks to emergency measures enacted by Washington after the widespread layoffs and job losses in 2008 and 2009. Ordinarily, unemployed workers receive only 26 weeks of state-paid support.

The extended unemployment benefits will continue through the end of this year, as part of the deal that President Obama negotiated with congressional Republicans last month to extend the Bush-era income tax rates.

Unemployment insurance is based on the theory that joblessness is a situation over which individuals have no control, like other things we insure against such as health problems, car accidents, and theft. This attitude makes sense when it is applied to short-term unemployment. There is nothing an individual employee can do to stop the plant she works for from being closed down, or to save her employer from having to cut payroll.

But studies have shown that, after the initial shock of job loss, motivation plays a big role in how quickly an individual secures new employment. When workers who have been receiving unemployment benefits approach the end of those benefits — and are therefore presumably most motivated to find new sources of cash — their chances of returning to work increase significantly, according to 1990 study cited by the Heritage Foundation.

This change in motivation can be explained as a change in what economists call the “reserve wage.” The reserve wage is the lowest pay rate that a worker is willing to accept in exchange for the inconvenience and costs associated with a particular proffered job. The costs of employment generally include things like buying work clothes, commuting, and eating more lunches out. Those who have been collecting unemployment benefits, however, also have to consider another cost: giving up their government checks. Once benefits run out, the cost of getting a job goes down compared to remaining unemployed, so the “reserve wage” drops.

In addition to potentially accepting lower wages, those who cannot count on unemployment benefits may also be willing to accept more inconvenience. They might, for example, consider jobs in other geographic areas or in other fields. Those without unemployment checks may also be willing to accept more risk in order to earn income. Many recent college graduates, who are generally new to the workforce and therefore ineligible for unemployment benefits, turned to entrepreneurship as a way to make their own jobs when employers were not hiring.

Meanwhile, people who get paid to not work frequently continue to not work. If you pay people to do something, they’ll generally keep doing it. That’s why, at Palisades Hudson, we don’t pay people to stay home and be sick. Instead of paid sick days, we provide a reasonable allotment of personal days and vacation time, which can be used for any purpose — whether that’s resting when sick or taking advantage of good health and good weather to go hiking. If people run out of paid time off and then fall ill, we work with them to arrange for unpaid time off while they recuperate.

Social acceptance of unemployment also makes people less motivated to find new jobs. A study released by the World Bank last summer found that people whose peers are also unemployed focus less on their pursuit of work, leading to a situation in which, as the number of people who are unemployed increases, each unemployed person’s effort to get back to work declines. The study explains, “If others are unemployed, I will search less and extend my unemployment duration, in turn affecting others’ return to work.” By allowing for longer periods of unemployment, extended unemployment benefits can make entire groups of people less likely to return to work.

Some people argue that, consequences aside, unemployment insurance benefits are a human right. The United Nations’ Universal Declaration of Human Rights states in Article 25, “Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family…and the right to security in the event of unemployment…or other lack of livelihood in circumstances beyond his control.” Yet this same document, in Article 23, defends “the right to work.” It does not say anything about the right not to work.

Long-term unemployment insurance, by promoting long-term unemployment, makes it harder for people to return to work when their benefits eventually do run out. While they’re not working, they miss out on opportunities to build new skills, foster networking connections and keep up with developments in their fields.

A report by the Pew Center found that, of people who had been unemployed and had then found work, those who spent the longest time between jobs were most likely to say the new job was worse than the previous one. This could simply be because people who have been unemployed the longest are more likely to have run out of benefits and are therefore more willing to compromise. But it could also be that people who have sat on the bench too long lose the ability to compete for the kinds of jobs that would be most satisfying for them.

I don’t think anyone would deny that there are many people collecting unemployment benefits who are doing everything possible to find work. For a lot of people in that situation, the benefits are a vital lifeline. But sooner or later, whether it is at 26 weeks, at 99 weeks, or at some other point, the benefits must run out lest short-term unemployment protection turn into a long-term welfare system. The question is where to draw the line.

Our society drew the line at 26 weeks. Amid spectacularly bad circumstances a few years ago, we nearly quadrupled that period. The crisis of 2008-2009 is well past. Even though unemployment will almost certainly still be high at the end of this year, it will be time to start getting the labor market back to normal. One of the first steps is to resume paying people to work, rather than not to work.

About Larry M. Elkin 534 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

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