The Moral Hazard of Unemployment Benefits

Unemployment benefits have come to the forefront of headline news this week.   In order to secure the extension of the Bush tax cuts for everyone (at all income levels), Democrats insisted on yet another extension of unemployment benefits- a full 13 additional months on top of the 26-98 weeks worth some people have already received.  If this extension is approved, it will be the sixth time since June of 2008 that Congress has extended the time deadline.   Most proponents of the perpetual extension of unemployment benefits insist that it is the only compassionate thing to do.  To cut anyone off of the government payroll is not something America should even consider since it would be so barbaric.   But, if this trend continues, we can just look across the Atlantic to our mother country, England, or any nation in the European Union and see what dismal financial future lies ahead.

Iain Duncan Smith, Secretary of State for Work and Pensions in England, denounced their current culture of dependence on welfare and unemployment benefits by saying, “In prosperous times, this dependency culture would be unsustainable.  Today it is a national crisis.”  According to government statistics, 1.5 million people in England have been unemployed and sucking the unemployment fund dry for 9 out of the past 10 years, even though millions of jobs were created during that same period of time.  What England is discovering, and what America will be forced to learn, is that what starts out as a safety net for people between jobs has actually turned into a relaxing hammock for a substantial number of citizens. England is now going forward with a plan to drastically reduce the amount of state-funded benefits that are dished out to the public. These reforms are aimed at encouraging citizens to re-enter the workforce and providing fire under their feet to get people moving as quickly as possible. England will save an estimated 500 million pounds a year on administrative costs and an additional 1 billion pounds on the reduction of fraud and error that come with their benefits system.   Deputy Prime Minister Nick Clegg said the reforms were designed to exemplify the true nature and spirit of the welfare state.  He said: “Nearly 70 years ago its architect, the great Liberal William Beveridge, imagined a system that gave people protection from cradle to grave – but not one that would act as a crutch every day in between. Beveridge’s dream has been distorted. Today’s system discourages self reliance, it disincentives work, it condemns the most disadvantaged in our society to a life on benefits.

Another example of the “benefits culture” gone wild comes from France.  A professor of mine, who grew up primarily in France but has lived all around the world, told my class one day about his French cousin.  His cousin had lost his job back in the late 1990’s, so the French government offered him unemployment compensation.  He gladly took it and then soon realized that he actually made more money on benefits.  Now, 15 some years later, a well-bodied and still young man has never worked another day in his life.  Instead, he travels the world and relaxes in the French countryside.  But don’t worry, the French government has him covered!

For some supplemental insight of the current state of affairs in England, Daniel Hannan, member of the British Parliament, is a great resource.  Below is a 35 minute interview with him by Stanford University’s “Hoover Institution.”

While England and Europe are reigning in their unemployment benefits and welfare states, America is expanding her own.   Hardly anybody is against helping out people truly in need or those down on their luck for a temporary amount of time.   But the question America faces is how much and how long should the government aid its citizens?   At what point does the protection of the state turn into a crutch?  In America today, people are eligible for up to almost 2 years (99 weeks, to be exact) of unemployment payments with the possibility that additional 13 months as a condition in the proposed tax compromise between Republicans and Democrats.   The United States is obviously in a recession with unemployment rates at 9.8%, double what the ideal rate is.   Most economists pinpoint the ideal rate of unemployment around 4 or 5% since there is always going to be people between jobs or switching careers, or industries that are gradually fading out (think of typewriter companies in the 1990’s when the computer market started to catch fire).

But what seems like a “free” benefit from the federal government is, of course, not free at all.  Unemployment compensation is largely paid out of the pockets of American businesses, big and small.   We must remember that any money the government “gives” out in the form of a “benefit” had to first be taken away from someone else in the form of a tax.  In case you are curious, you can calculate your household’s share towards paying out these benefits by clicking here.

Footing the bill for most of these benefits are employers who pay state and federal taxes on a percentage of wages paid out to each employee.   However in some areas of the country, unemployment insurance premiums paid by employers have doubled, tripled or even more in the past year.   Greg Howard, owner of McCabe’s Tavern in Colorado Springs, told the Colorado Springs Gazette his bill spiked a whopping 600 percent. “It’s enough to T you off a little bit,” Howard told the newspaper. “The dollar amount isn’t tremendous, but it’s going up six times.” Michelle Malkin wrote this week about a small painting contractor whose first quarter unemployment insurance went up from $1,000 to $6500 in 3 years. She explained that, “It’s killing us! How can we hire additional employees? This is a big increase in addition to the health insurance annual increases, etc. We had to reduce our employees’ wages by 10 percent this year, and who knows when we will be able to bump them back up?” Unfortunately, it is extremely difficult, if not borderline impossible for any business to budget effectively when they are always unsure of what they will have to pay out in unemployment insurance premiums.

With the permitted time to draw unemployment benefits approaching 3 years, the United States must sit back and seriously think about how much further they will let this continue.   Free market thinking economists keep shouting that unemployment benefits are not the way out of a recession.   Sometimes, in order to recover, the current labor markets have to clear and balance out (meaning perhaps even higher unemployment for a brief time) before true forward progress can be made.   We have seen, through Europe, what the future holds for expanding the “benefits culture”- an ever-increasing segment of society that prefers to take much more out of the government than they ever contributed; a people that would rather be idle and mediocre than aspire to greatness.

Note:  This is the 4th segment in my 10-part blog series found here.