Time was when you could rely on taxes to be the topic in the US come mid-April. No longer. This year it’s jobs, jobs, jobs. In Washington, Democrats want to extend expiring unemployment insurance. They see their plan as action in the spirit of Franklin Roosevelt, who put forward so many programmes for the worker with his New Deal. Republicans are muttering about what the benefits do to individual initiative. But they are also going along with the plan to extend jobless payments.
The emphasis on extension sounds humane and necessary. Hundreds of thousands of families are losing benefits. Yet that emphasis is counterproductive, because it overlooks the problem that is making it hard for the jobless to get work in the first place. Part of the problem is the relationship between the cost of hiring for employers and the cost of being unemployed for workers. By making hiring expensive through mandates such as health care, the administration is discouraging hiring. By extending benefits for the jobless, the same government is making unemployment less painful – cheaper – for workers. The combination sustains unemployment at higher levels, not lower.
One economist illuminating this dynamic is Casey Mulligan at the University of Chicago. Mulligan points out that many industries aside from manufacturing are now recovering. But many companies are finding ways to do so with fewer workers. This isn’t a general recession any longer. It is becoming a jobs recession where the incentives for employer and employee are out of whack.
Mulligan also notes that there is specific evidence of the counterproductive force of making unemployment less expensive. Two scholars, Stepan Jurajda and Frederick Tannery, looked at Pittsburgh in the first half of the 1980s, a period when the nation had two temporary increases in unemployment benefits. They determined that one third of those claiming unemployment found work within weeks of the expiration of their benefits, but not before. Apply that Pittsburgh experience to today, when insurance is also running out, and what it tells you is that jobs will come back faster if Washington doesn’t extend insurance benefits.
The Pittsburgh data is merely a tiny part of a large body of evidence. In policy discussions we make a big deal about the differences in payments to the unemployed, treating ‘relief’ as different from ‘welfare’ and ‘welfare’ as different from ‘unemployment insurance’. But they all function the same way: they damp down the incentive to find a job.
The ultimate evidence here is from the 1920s, when the Labour Party came to power in Britain for the first time. Labour passed laws that gave unions power to demand higher wages, and to create unemployment benefits. The result was that employment became more expensive for companies. Unemployment, meanwhile, became relatively less expensive to workers because the workers now received relief payments. As scholars Daniel K. Benjamin and Levis Kochin pointed out in the Journal of Political Economy paper as far back as 1979, the moment was one in which, “unemployment benefits were on a more generous scale relative to wages than ever before or since”. The result was the mother of all jobless recoveries. For almost two decades, from 1921 to 1938, UK unemployment averaged 14%, and never got below 9.5%. For two decades Britons talked of the tragedy of ‘idleness’ and the ‘dole’.
One New Deal politician who grasped at least part of what was happening in Britain was that hero of today’s Democrats, Roosevelt. Roosevelt understood that relief payments in the UK weren’t necessarily helping workers find employment. He appalled his progressive colleagues by disparaging the dole whenever he could. Rather than pay the unemployed, Roosevelt preferred creating jobs through the public sector. Still, Roosevelt and his colleagues replicated other British errors. FDR signed laws that put upward pressure on wages, the most dramatic example of these being the 1935 Wagner Act. This in turn led to real increases in wages, leading to slower hiring.
More recently, the US repeated the pattern in the Aid to Families With Dependent Children programme, which made life worse for those families. They never got work. ‘Welfare,’ the word we used for the programme, likewise became stigmatised. President Bill Clinton signed the law that abolished the programme, sending a signal that work is better for the country and individual than the dole, relief, or insurance.
US politicians now are reversing that progress, perhaps without being aware of what they’re doing. Eventually, they will understand. And eventually those phrases we utter now – ‘insurance extension’, ‘mandatory healthcare at the workplace’ – will also be dropped from the language in shame. But, of course, by then the damage will have been done.
• This article was first published on Bloomberg