1.7 Trillion Weeks of Unemployment Benefits

In the past four years Federal and state unemployment insurance programs paid about 1.7 trillion weeks  (32.7 million years) of unemployment insurance benefits to jobless workers as they continued their job search.  32.7 million years is a remarkably long time period that is usually reserved for events measured on the geologic time scale (South America fully detached from Antarctica about 32.7 million years ago during the Oligocene Epoch).  Unemployment benefits were paid to an average of nearly 8.2 million workers per week, every week, for the past four years.  The unemployment insurance rolls have been quite high for an unusually long time because of the depth of the recession, the weakness of the recovery and because Congress and the President extended unemployment benefits so that job losers could collect benefits for up to 99 weeks. 

More generous benefits undoubtedly provided greater financial support for job losers and their families, but also encouraged jobless workers to be more selective in their job search and remain unemployed longer.  Many Democrats and Keynesian economists view the unemployment insurance program, food stamps and other social safety net programs as economic stimulus.  On the other hand conservatives, such as Casey Mulligan of the University of Chicago, argue that the work disincentives of the unemployment insurance program and other safety net and entitlement programs increased the depth and length of the recession.

One way to quantify the opportunity cost of providing unemployment insurance benefits to approximately 8.2 million jobless workers per week is to consider how many employees could have been hired using those resources.  Although unemployment insurance benefits vary by state, the typical weekly benefit is about one half of a worker’s previous weekly wage.  This means that the cost of insuring 8.2 million jobless workers per week is about the same as the wage and salary costs of employing 4.1 million workers per week. 

Many economists have complained that the government stimulus didn’t include enough investment in infrastructure or purchases of goods and services.  Our representatives in the Federal government chose to pay people to search for work rather than employ them directly for public works projects.  But how many roads, bridges, schools and other valuable public sector investments could have been completed instead of paying for 1.7 trillion weeks of job search?  Instead of paying half of the typical weekly salaries of 8.2 million people looking for work each week, we could have instead:

• Paid the salaries of every worker employed in the construction and repair of streets, highways and bridges for the next century
• Paid the salaries of every elementary and secondary school teacher in the U.S. for four years.
• Paid the salaries of all workers in the motor vehicle (and parts) industry for two decades.

Democrats and Keynesian economists lament that state and local government employment has fallen 1.8% over the past five years instead of the 3.9% growth from 2002 to 2007.  The relatively small decrease in state and local government payrolls pales in comparison to the cost of jobless benefits over the past four years.  The money paid to unemployed workers per year over the past four years is equal to about 1/5 of the annual salaries of all state and local government employees combined.

Hoover Dam, The Grand Coulee Dam, LaGuardia Airport, The Lincoln Tunnel and many other public works projects were built during the Great Depression when many of the workers on these projects had few other job options.  The economic approach to dealing with the 2008-2009 recession has been quite different.  In 2013 we will reach 2 trillion weeks of unemployment benefits paid since the recession began.  When the history of this recession and recovery is written it will be clear that we did not use this time of excess capacity and idle workers to re-build and re-tool our infrastructure.  We will not be able to point to the dams, bridges, highways, schools and hospitals that were built during the recovery even though about two million construction workers lost their jobs after the residential real estate market collapsed and many of them are still out of work.  Instead the approach of this Administration and this Congress has been to pay people who lost their jobs to look for work, even though many of the jobs that were lost in the recession are no longer there.

Forward? More on Inefficiency in Government

Economic advisors who advocate Keynesian policies must convince voters and taxpayers that more government spending will stimulate economic recovery.  Since many government spending programs just divert resources from one activity to another, it would be helpful if advisors advocating a bigger government sector could point to programs that work, i.e. where the benefits exceed the real opportunity costs.  Although it is difficult to identify and accurately measure all of the benefits to many government programs, when voters and taxpayers see obvious waste and inefficiency it is harder to make the case for more government spending.

Like many residents of Northern Virginia I observe the inefficiency of the Washington DC public transportation system on a daily basis.  I have boarded the morning train at Rosslyn during rush hour hundreds of times over the past two years.  Orange line trains arrive from the west, Blue line trains arrive from the south, and either train takes riders downtown.  Ask anyone at the Rosslyn station on a weekday morning and they will tell you the same thing: Orange line trains are predictably over-crowded and often it is impossible to board due to a lack of space.  Blue line trains always have space and often one can find a seat.

Clearly there aren’t enough Orange trains running in the morning relative to Blue trains.  This is inefficient.  Transportation costs can’t be minimized if there are predictably fewer passengers per train on Blue lines than Orange lines during rush hour.  This should be obvious to management at the Washington Metropolitan Area Transit Authority (WMATA).  Although reallocating trains may represent a small cost saving there is no reason to remain inefficient.  The fare changes (it costs $1 more for a paper ticket) have shifted nearly all rush hour commuters to a plastic Smart Card that tracks movements throughout the WMATA system.  If taxpayers can’t trust the government to run operations like WMATA efficiently, the case for more government spending is much less convincing.

The inefficiency at WMATA is seen in many other government agencies and in many public institutions.  The next time public college university administrators complain about the shortage of classroom space and advocate for more infrastructure spending they should be required to show how efficiently classroom space is currently being used.  On most college campuses classrooms are less utilized early and late in the day, and on Monday-Wednesday-Friday relative to Tuesday-Thursday (let alone when comparing summer to the traditional school year).  Colleges and universities should use their current physical plant efficiently before taxpayers are required to spend for more space.

The big debate in this fall’s Presidential election will be over the proper size and scope of government.  Regardless of the outcome of that debate, politicians and bureaucrats should be held responsible for waste and inefficiency in spending programs.  There is no doubt that we can’t fix our fiscal problems just by reducing waste and inefficiency in government.  But wasteful government spending diverts resources from more productive uses and will not help an economic recovery, regardless of what some advocates might say.

Answering Tim Harford on the Minimum Wage

In Saturday’s Financial Times Tim Harford asks the question “Can the Minimum Wage Create Jobs?”  The simple answer is yes, but not as many as it destroys. Any policy has winners and losers and the minimum wage is no exception. The losers are young and unskilled workers who become more expensive but no more productive to prospective employers. The winners include semi-skilled workers who compete with minimum wage workers and producers of the capital equipment that companies use to economize on unskilled labor. Crony capitalism is not limited to tax breaks, subsidies and bailouts; the minimum wage can also benefit unions threatened by cheaper non-union workers.

Harford cites the “amazing” and controversial Card and Krueger study which showed that a higher minimum wage didn’t reduce employment in fast food restaurants in New Jersey. Putting aside possible problems with their data discussed by other economists, Card and Krueger looked for job losses at restaurants with the least labor intensive food preparation methods in the history of mankind. (e.g. most have outsourced the task of filling cups with ice and soft drinks to their customers to save labor costs). A higher minimum wage raises the relative cost and price of made-to-order sandwiches in labor intensive competitors and may actually increase demand at fast-food restaurants. The Card and Krueger study says nothing about how a higher minimum wage affects the aggregate employment of unskilled labor.

Harford correctly notes that minimum wage laws attempt to treat a symptom of a larger problem. The real problem is that many young workers lack the skills that employers demand. Unfortunately the minimum wage makes it more difficult for young adults to acquire vocational skills because it makes on-the-job training programs less viable. Companies will provide general training only if workers “pay” for it through a lower wage because a company loses its investment when trained workers (who received full pay) leave. The minimum wage limits the ability of young workers to “pay” for on-the-job training and apprenticeships. This is especially costly if vocational and for-profit schools are ineffective alternatives for developing marketable skills.