Unemployment Insurance – Unintended Consequences and Intentional Neglect

Under Water and Sinking

In his weekly NPR radio commentary, Robert Reich points out the antiquated and flawed nature of current US unemployment insurance policies.

http://marketplace.publicradio.org/display/web/2008/02/06/unemployment/

You can listen on the link above as he is both astute and succinct.

In summary, he points out the need to expand or at least adapt the unemployment insurance policies to better reflect the times we live in. Those who know me have heard me lament our tax code and its purposeful inefficiencies. Mr. Reich’s unemployment talk strikes me as another tax evasion issue.

Unemployment compensation is as “progressive” as our tax system, They advertise your Netflix bill at $15, when we all know it really costs $20 (33% tax by the way). Who really cares what each line item might be or which government entity gets the pennies. As Mr. Reich points out, the same sleight of hand goes into the administration of our seemingly generous unemployment safety net.

And just like our tax code, the unemployment insurance system is extremely antiquated and leads to evasion and abuse on the part of employers. Any fan of “Freakonomics” will understand when I assert that the spike in part-time and temporary workers is an unintended consequence of other policies. The unintended consequences of mandated healthcare, and unemployment insurance, being that employers both avoid paying benefits and avoid the expenses of “unemploying” a full time worker when then hire part-time employees.

As a former micro business owner, I well understand the impact of one superfluous employee on the bottom line, and conversely, one fewer then necessary on the quality of the product. It is therefore reasonable that service and retail sector employers that may require thirty employees at peak business hours and only ten for the remaining hours of operation would resort to part-time help.

Part-time workers are uniquely suited to fill job slots in restaurants and the retail sector especially; hence the spike coincides with the shift of the US economy to service sector jobs. Of course we could also argue that the shift to service sector jobs was caused by the vitual subsidy for part-time worker rather then the other way around. Full-time employing manufactures subsidize the cost of public service entitlements for part-time worker employers and this may have driven capital investment away from manufacturing. Whichever caused which the full-timer employer pays more per hour then the part-time employer making this a simple economic problem.

This has only become a real problem because in industries with low turnover costs (the cost of getting a worker up to speed) have also been moving to a higher percentage of part-timers. As soon as the cost of turnover is less than the cost of full-timer benefits and full-timer taxes, an employer will move to part-time workers.

Our current system of unemployment insurance has not adapted for this evolution of our economy. You can argue as much as you want about whether we should have unemployment insurance or not; just like taxes. But you have to agree that if we must have an employment assistance system; it should be effective, targeted correctly and with costs borne evenly across all industries.

Robert Reich’s commentary on this problem demonstrates that there is both an understanding of the problem and some fine proposals for it’s remedy. Though I have the utmost respect for Mr. Reich, I am sure he is not the only one to recognize this problem. In fact, I bet there are many great policy solutions bandied about throughout Washington.

So why no major changes over the last few decades?

And then it hit me; of course we can’t change the system, because if we do, businesses and rich people will just find another way to avoid it. I’ve heard it so many other times when positive change is proposed but not implemented. It’s the same refrain against Huckabee’s tax code or another other policy proposal that can’t be worse then the status quo; at least for those who can’t pay $50,000 for an accountant each tax year.

If we change how part-timers are handled for unemployment insurance, businesses will just adapt in unintended ways; better stay with the status quo. Feed it more money if you’re a Democrat and starve it if you are a Republican. Either way, keep it in the cage of the status quo.

Is this argument of untended consequences being for the benefit of only the rich and powerful valid?

I say no, in fact it’s the opposite. Say we change unemployment insurance to remove the full-time/part-time distinction and implement as a pro-rated system based on hours. I’m sure big companies like Home Depot and McDonalds will pay their accountants millions of dollars to devise new hiring and employment practices to give them a leg up on smaller businesses with fewer resources. But what if we then adapt these new policies to compensate for any unintended consequences; say within two to five years of the new problems recognition. Remembering that the current system was adopted decades ago with little substantial change since and the shift to part-time workers was gradual over these many decades. Won’t business react to adaptable, therefore effectively temporary changes to employee taxes and laws, just like all economist feel individuals react to a temporary tax cut. Accountants may devise ways to evade the new laws, but if it takes years to implement across huge companies they won’t attempt it under the uncertainly of future changes.

I’m not proposing any particular solution for updating unemployment insurance. But any time you look at a problem that can at least be ameliorated to some extent by policy action, and there is no action, the inaction it is deliberate, Machavellian and most importantly short sighted.

 

Just because unemployment insurance may be a contributing factor in the increase of part-time workers, does not remove it as both a part of the social contract and, in the context of current events, a valid tool for fighting a recession. The absence of any improvement to unemployment benefits demonstrates another instance of poor political policy outweighing sound economic policy.

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