Improving UI With Lump Sum Payments
Annie Lowrey and Even The Conservative Josh Barro argue in favor of reforming the Unemployment Insurance system so as to make extended benefits eligibility automatic in times of economic depression. Barro:
I haven’t seen any specific formulas proposed (if a reform is on the table, readers, please alert me) but in general UI should be extended when unemployment is high and/or rising, and contracted when it is low and/or falling. A formulaic adjustment program could mimic what Congress habitually does already, but without generating market uncertainty — or incurring risk that Congress will be too timid to pull the trigger on abbreviating UI benefits in recovery.
I agree with the spirit here. One of the big lessons of the Great Recession is that relying on discretionary congressional action in the middle of a downturn is not a great idea. We need to set up systems that have more automaticity. That said, I saw a mind-blowing chart on Mike Konczal’s blog a couple of weeks ago that suggested that everything I think I know about Unemployment Insurance is wrong.
Here, then is some hot, hot empirical research from Austria:
What happens at 36 months? Well, in Austria if you’ve worked a job for at least 36 months, then you get your UI in terms of a single lump-sum payment, rather than a sporadic paycheck. Conventional UI in effect pays people to not work, and thus creates a disincentive to find a job. The general view is that this disincentive effect needs to be balanced against humanitarian issues and aggregate demand considerations during a severe slump. But the Austrian evidence suggests that conventional wisdom is badly misconstruing the situation. Instead of the lump sum encouraging people to take new jobs more quickly by removing the disincentive, it encourages them to wait even longer before finding a new position. Konczal says this is a more efficient reallocation of resources: “This is people searching for a job they fit into better, this is people making their basic payments and obligations, hedging against future risks and future financial ruin, this is people being able to efficiently make the choices for how to fix back into the economy.”
Interestingly, whether you agree with Konczal’s interpretation or want to stick with the traditional disincentive view, either way the lesson seems to be that the main reform UI needs is not automatic extensions, but transformation into lump-sum payments. If you want to do something automatic, you could add some criteria that triggers a new round of payouts.
26 Responses to “Improving UI With Lump Sum Payments”
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July 30th, 2010 at 8:59 am
The graph would be less impressive if the y axis ran from 0.
July 30th, 2010 at 9:00 am
Matt, I think you’ve either written this up wrong, or you’re misinterpreting the data. The people who get the lump sum stay unemployed longer. Why would we want to reform UI to keep people out of work longer, unless you agree with Konczal’s interpretation?
Also, was this data based on the current slump, or during a growth period? It’s been reliably demonstrated that UI leads to longer unemployment times when times are good, but that the driving factor for unemployment during slumps is lack of jobs. Knowing when this data was compiled is pretty important.
July 30th, 2010 at 9:10 am
I mentioned this yesterday and happy you did a post on it.. In addition, in the current system if you earn even $1, you will lose all of you unemployment benefits. Lots of unemployed folks probably end up starting businesses, and yet the current system discourages that. This women lost unemployment over $1 in earnings:
http://gizmodo.com/5381574/earning-130-per-day-from-adsense-is-enough-to-lose-unemployment-benefits
There was article last month about landscaping companies not being able to hire the workers they needed in Detroit because unemployment paid more to stay home.
A lump sum system or less payments the longer you are on unemployment is clearly a better system than what we have now that discourages working or starting a new business, which really help the economy recover.
July 30th, 2010 at 9:13 am
Look at the effect size: the difference in means is only 10 days, out of 150-160. I don’t know if they’re including weekends, but even if they are, that’s only 2 weeks. The real story here is that the difference is too small to matter.
If you do think the difference is big enough to have practical significance, though, the major issue is whether you see unemployed skilled workers becoming desperate enough to settle for McJobs as a good thing or a bad thing. Underemployment is pretty inefficient too (especially if the person who takes that McJob then goes on to keep looking for a real job and leaves for it, causing even more turnover in the McJob — it’s hard to argue that there’s anyone who wouldn’t be better off if they hadn’t just waited and let someone with no particular skills get the McJob in the first place.)
July 30th, 2010 at 9:19 am
The UI acronym is already taken. Please find something else.
July 30th, 2010 at 9:21 am
If you believe that the disincentive effect is real, but lack of jobs is the bigger factor, then the current system may be perfect.
Congress grants additional UI when times are bad, when people really can’t find jobs. But Congress dicks around with it, so people don’t get too comfortable on UI.
July 30th, 2010 at 9:25 am
Do you have mandatory redundancy pay in America for people laid off after long periods in a job? That seems to fulfil the same purpose as lump sum UI. Wouldn’t that be a better plan? Obviously it’s a disincentive to hiring, but in Britian mandatory redundancy pay only applies after 2 years employment so that stops it being a big factor. Should certainly be part of the discussion as it’s much the same thing, only employer pays rather than government pays. If you already have it, should it be increased?
July 30th, 2010 at 9:26 am
No, that’s a pretty amazingly sharp effect — the magnitude of the jump is much larger than the noise. This means the change in policy is resulting in a change in behavior.
July 30th, 2010 at 9:47 am
@5 The UI acronym is already taken. Please find something else.
Is there any instance of “UI” that wouldn’t be improved by lump sum payments?
July 30th, 2010 at 9:57 am
“automaticity?” Sheesh. I can’t decide if that is better or worse than “tenaciousness.”
July 30th, 2010 at 10:07 am
In addition, in the current system if you earn even $1, you will lose all of you unemployment benefits.
What state is this? It’s certainly not the case in MA.
July 30th, 2010 at 10:13 am
Wait, I’m with Danny – it looks like the data points in the chart are making the opposite point that you are? People who get the lump sum payment, stay unemployed longer?
July 30th, 2010 at 10:16 am
I mean, I see the point – you want people to take sustainable jobs that will help them in their future, not just any job. But the data presented here doesn’t show evidence of that. It just shows evidence that people who receive lump sums stay unemployed longer (which is generally seen as bad). You’d need to show stronger evidence that this is ultimately beneficial for them for me to be convinced that this was positive, not negative.
July 30th, 2010 at 10:30 am
Don’t read the chart left-to-right and go, “Oh, disincentivized people stay unemployed longer!” Read it right-to-left and go, “Oh, unemployment insurance isn’t incentivizing laziness!”
The people on the right are doing what’s best for them, given that from the start they have mapped out for themselves what their available resource are. The people on the left have some different behavior. And apparently, they feel LESS secure and are more frequently taking a first job, unless you can come up with some reason that the employability of someone who has worked at a job for 35 months is so concretely different than that of someone who worked for 36.
Don’t get wrapped up in the absolute value of the numbers, just consider what the change in behavior means.
July 30th, 2010 at 10:32 am
interesting. I think lump sum would work better in a recession than in normal times-you wouldn’t want ppl getting a huge lump sum if they were able toget a new job right away-that’d just be pointless welfare that would incentivize leaving your work ever so often.
July 30th, 2010 at 10:51 am
On behalf of the dearly departed “LeBron James,” it must be said:
CHECK MY STATS!
July 30th, 2010 at 11:16 am
CHECK MY STATS!
Lebron doesn’t get wi-fi in south beach yet. Some douchebag wearing wearing his Heat jersey had to be escorted out of progressive field by security last night. Try that shit at a Browns game, asshole.
July 30th, 2010 at 11:40 am
Unemployment paid more to stay home? So these landscaping companies weren’t even paying minimum wage? (offering part-time employment perhaps)
Ah, I see in the article (googling “Detroit landscaper unemployment” worked pretty well). Employment with deductions versus unemployment without deductions. Even though you have to pay taxes on unemployment checks anyway, they’re just not withheld by default. …and, uh, you fill out a form W-4 when you go to work and if it’s going to be a problem meeting short-term financial obligations you can ask not to have your taxes withheld.
…and I see that the opening paragraphs are based on businesses talking about, say, a whole twelve people refusing job offers, not being completely unable to fill positions. And then later in the article you have other companies saying basically “what’s this about not being able to hire people?”
I don’t think it’s very surprising that at least twelve people in Michigan aren’t well-informed about withholding taxes. I’m not sure how you get from there to the negative effects of unemployment insurance.
July 30th, 2010 at 11:58 am
The chart seems counterintuitive to Matt’s point, but he makes sense if you go read the entire Konczal post (which is outstanding).
There are other charts there, more salient to Matt’s argument, that provide evidence that Unemployment Insurance is only a disincentive to work for those who have a liquidity crunch (short-term debts) and thus converting to lump-sum payouts would eliminate both the liquidity crunch and the work disincentive (the lump sum doesn’t get clawed back if you find a job).
July 30th, 2010 at 12:02 pm
Wait…. we want to change UI policy to a lump-sum based on empirical evidence that it will make people unemployed longer? That’s a good thing?
?
July 30th, 2010 at 12:05 pm
UI in Michigan only pays $294 a week on average or $7.34 an hour – that’s basically the Federal minimum wage. So these landscaping jobs would have had to be extremely low waged.
Regarding the original topic, NO! Lump-sum is a bad idea in a recessionary economy when people’s liquidity preference is through the roof – they’ll try to hoard that money because they don’t know when they’ll get a job. The whole point of structuring UI like a weekly paycheck is that it gives a feeling of security that enables people to go out and consume, preventing the economy from going into a further tailspin.
Everyone here knows I’m in favor of direct job creation first. But at the very least, we should at least say that as long as the applicant to opening ratio is above a level at which we can expect people to find a job within the given period of benefits, that UI should be automatically extended. (http://realignmentproject.wordpress.com/2010/06/22/classic-trp-front-line-of-defense-rebuilding-unemployment-insurance/)
July 30th, 2010 at 12:57 pm
I question how useful this graph really is. With mass unemployment, there are going to be large sectors of the market where there are simply no jobs. So to take anything at all would be to move pretty far outside one’s skill set, with a steep downward trend to lower wages.
For such individuals, the only incentive that matters is regaining employment at their skill-level, and that won’t happen until the market expands again. This is certainly the case with myself and other unemployed I know. There is a desperation to obtain proper employment again that no amount of “incentive” fiddling will resolve.
July 30th, 2010 at 2:52 pm
Agreed with Eli @ 22.
Another point I should have made in my post on this topic: This chart is useless unless it’s adjusted for the total amount of unemployment insurance disbursed.
If lump-sum disbursements are large by comparison in comparison to continuous payments, why not take an appropriately long vacation, with no corresponding lifestyle sacrifice? If you were on a lower continuous rate, the squeeze would be on immediately (barring the presence of large personal savings).
The Ydiot
July 30th, 2010 at 5:17 pm
Matt’s actually made a bit of a mistake in presenting things here. After 36 months you get two months’ gross salary as severance pay, in addition to a continuing unemployment benefit of 55% of net salary, or about 40% of gross salary given the median tax rate of about one-third, and your unemployment benefits are guaranteed for 30 weeks (that’s 210 days).
The vast majority of the people on the immediate left side of the discontinuous curve also have the guarantee of extended benefits as they accrue from having worked 36 months in the past 5 years. So both these groups of people are, on average, finding jobs before their benefits run out, and even though the people on the right side of the jump have gotten about double the money of the people on the left, they only stay unemployed for 10 more days.
July 30th, 2010 at 5:55 pm
One thing in favor of the lump sum is that it would make it easier to move for a new job.
August 2nd, 2010 at 11:43 am
I heard Raghuram Rajan (from a freshwater school no less) on the radio recently. He had a very interesting take on unemployment insurance, basically that Americas lack of a safety net encourages reckless monetary expansion. Because we find unemployment to be a moral failing, we cannot allow a contracting economy, we are compelled to constantly gun the economy. His concern seemed primarily about fiscal policy (what I got out of it was this made our economy much more fragile then it ought to be). Regardless, the point seemed pretty fundamental. It reflects what I’ve believed for a long time, if we demand a certain level of structural unemployment, we need to provide for the unemployed structurally as well.