Saturday, April 10, 2010

Extending Unemployment, Part II

President Obama said that the number one goal of the 2009 Stimulus Bill was to create jobs. This bill extended unemployment benefits by up to 33 weeks and increased their amount by $100 a month. Unemployment benefit money comes from taxing employers, so expanding these benefits reduces the number of jobs — the opposite of the Stimulus goal.

Existing Jobs Are Destroyed

All employers strive for revenue (income from sales) to exceed costs; otherwise, debt accumulates and failure awaits. Expanding unemployment benefits requires raising taxes on employers, which lowers their revenue. Reduced revenue compels employers to cut costs. A major cost is employee salary, so cutting costs generally means cutting employee salary, which means laying people off. In this way, expanding unemployment benefits sets off a chain reaction that expands unemployment.

There's another aspect worth considering. Say that you're an employer thinking about laying someone off. On a personal level, you'd feel guilty for causing hardship. But wouldn't you feel less guilty knowing that this person would receive expanded benefits, and knowing that you've funded those benefits? Any policy that makes it easier for employers to cut jobs is bad for job creation.

Fewer Jobs Are Created

Expanded unemployment benefits discourage the creation of new businesses because prospective employers know that higher taxation makes it more difficult to profit and to survive. And fewer new employers translates to fewer new jobs.

Additionally, the fact that money is taken from people who create jobs (employers) and given to people who are only looking for jobs suggests that fewer jobs will be created.

Since the Stimulus Bill was signed, the number of Americans receiving unemployment benefits has more than doubled, growing from 4.8 million to 11.4 million people. Recently, there's been an additional benefits extension of up to 20 weeks. As generous as these benefits seem, we should keep in mind that they require taxing employers, which just ends up expanding unemployment! America cannot afford to continue this vicious cycle.


  1. i personally dislike the term "unemployment benefits" because it implies that people want to be unemployed which is both

    1) in my opinion, not really human nature. Besides a source of income, employment gives our lives meaning as it is where we spend a majority of our time.

    2) unemployment benefits in America are nowhere near the level that they are in many other countries, such as those in europe, and defintely do not allow those whose only income is the benefit to have a quality life. they are meant to keep the person alive so they can find a job.

    what's really keeping people from becoming employed right is the lack of demand for the things that these people could be hired to produce.

    Even if employers were never taxed at all, they could still have an incentive to cut jobs. If the goal of an employer is to maximize profit (maximize revenue plus minimize costs through technology and worker efficiency ) so that they can improve their chances of surviving and the goal of a worker is maximize their "profit" (maximize their income plus minimize their costs which could be the hours they spend working, etc yada yada), then we see that these two opposing views are bound to collide. Sure one could point to a theory of equilibrium but it never seems perfect equilibriums exist in the social world .

    i like the post and the name of the blog.

  2. Good points - I have some thoughts on each...

    It's absolutely right to consider individuals' human nature when discussing social policies. I agree that employment adds meaning to people's lives, but lives can be very meaningful without employment. Stay-at-home parents are just one group of people who may not be "employed", but are living very meaningful lives. Significant unemployment benefits (many people are receiving >$1000/mo.) allow individuals to contribute to their family's monthly income, while at the same time allowing them to spend quality time with their families. So I'd content that it's human nature for some people to delay employment so long as they can keep receive significant unemployment benefits.

    Along those lines, when you say that American unemployment benefits do not allow those whose only income is the benefits to have quality lives, what about married people? An unemployed father's only income now might be the benefits, but perhaps he can rely on his wife's income for awhile and save on child care by staying home with the kids. So the benefits may have improved the quality of life for this family, but that improvement comes with a cost to employers and the nation as a whole.

    Good point about the reduced demand, and it begs the question of why the reduced demand...

    Lastly, I want to make an important modification. You say that profit-seeking companies have an incentive to cut jobs. I'd say that profit-seeking companies have an incentive to cut waste, which will in some job loss, but also results in lower production costs and cheaper products. Thus the country can buy more for less, which increases the value of people's income, increases the demand for cheaper products, and ultimately ends up adding jobs at the profit-seeking companies. For example, so many of the most consistently profitable enterprises (McDonalds, Microsoft, etc.) provide enormous levels of employment.