On welfare incentives

A loyal reader has chastised my defence of welfare benefits for ignoring incentive effects. This deserves a reply.

The issue here is not about Osborne's welfare cuts, simply because these haven't, net, made much difference to incentives. On the one hand, the rise in the "living wage" relative to Universal Credit will increase incentives to work. But on the other hand, this won't affect under-25s (who aren't covered by the wage floor); cuts to in-work tax credits reduce work incentives; and the higher taper rate reduces incentives to work longer. Overall, says the Resolution Foundation's David Finch:

These changes will do very little to improve the incentives for low paid families to find a path into work and then to progress.  

Instead, the issue is a fundamental trade-off facing any benefit system - that of incentives versus risk reduction. Low out-of-work benefits sharpen incentives for the unemployed to find work. But they also mean that people losing their jobs face a bigger cut in income, which could deepen any recession.

I'll concede that the incentives argument has some merit. Some of the unemployed do reject job offers because they'd prefer to stay on benefits. And  Barbara Petrongolo has shown that a tougher benefits regime does incentivize job-finding. The question is: how strong is this argument?

Let's do a back-of-the envelope estimate. If we could move 300,000 people - almost all those who have been unemployed for more than two years - from unemployment to full-time minimum wage work GDP would rise by around £5bn: this is £3.8bn of wages plus around £1.2bn of extra profits from employing them. This is around 0.3% of GDP. However, a serious recession could easily cost 5% of GDP. A generous welfare state, being a strong automatic stabilizer, would save a big fraction of this.

Which should we prefer? It depends on many issues:

1. How sensitive is job-finding to unemployment benefits? I doubt if many people think: "my benefits have been cut, so I might as well stop watching Jeremy Kyle and take up that offer of a professor of maths." I suspect many of the voluntarily unemployed are borderline unemployable and so not very amenable to incentives. This is consistent with evidence that the 2010-15 welfare reforms, such as the benefit cap, did not greatly increase job-finding. 

2. What's the mechanism whereby the demand for labour increases to meet the increased supply? One possibility is that wages get bid down. But this channel is silted up by a rising minimum wage. Another possibility is that vacancies get filled faster, which makes firms more efficient. But Ms Petrongolo shows that those who are incentivized to find work by benefit cuts are less likely to stay in work - which suggests that low benefits lead to worse job matches, which is bad for firms.

3. Can macro policy be used to stablize the economy? If the answer's yes, then there's less need for a generous welfare state as a stabilizing device. My view, though, is that recessions are unpredictable and so policy cannot prevent them.

4. Do recessions have permanent effects on GDP? In my example, the benefits of getting the unemployed into work - subject to the above caveats - are long-lasting, whereas the benefits of stabilizing recessions come only once every few years. However, if recessions have long-lasting adverse effects upon future growth, then it becomes more important to cushion ourselves from them.

5. How important is it to punish those who violate the norm of reciprocity? The issue here is not merely one of economics, but ethics. Many people hate the idea that some of the unemployed are getting something for nothing at the expense of the rest of us. How much weight does this preference have?

6. How should we weigh false positives against false negatives? A tough welfare regime punishes "scroungers", but also the "deserving poor" - those unlucky to lose their jobs, whilst a more generous welfare state is kinder to both.

Many people's attitudes to these issues are based in part upon ignorance - an overestimation of benefit spending. Nevertheless, in the fact-based world, reasonable people will disagree here. But let's be clear: I am not ignoring incentives, but merely doubting how much weight we should put upon them.      

Comments

[e]

“A tougher (penal) benefits regime does incentivize job-finding” but also casual under the radar trades and disengagement more generally – particularly among those unwilling or unable to embrace a form of victimhood. Borderline unemployability is a consequence, not a starting point unless age, illness, or disability is an issue. It also makes self-directed retraining all but impossible.

[Bob]

I think its a specialised version of the broken windows problem.
"but also the "deserving poor" - those unlucky to lose their jobs"
Then give them jobs! That's what they want. As to the "scroungers" will also be easy to see who is or isn't.

[Phil]

Dunn's research sounds interesting, but I hope the published version is a bit less "I'm not one of those lefties, me". I wanted to know how much of the population of unemployed people declining work was made up of graduates, whom he described as the largest sub-group - is that 'largest' as in 24/22/20/18/16, as in 70/20/10, or what? This would be worth settling; if you are a graduate looking for (what we laughingly call) graduate-level employment, declining the offer of a zero-hours contract from the local supermarket makes perfect sense, in terms of both immediate self-interest & longer-term economic benefit. If I'm too busy stacking shelves to get my c.v. into shape and get unpaid work experience, the chances are I'm never going to get the jobs that graduates are applying for - and, assuming I could have done them, we're all the worse off.

[aragon]

1. Not at all
http://www.channel4.com/news/benefits-iain-duncan-smith-welfare-revolution-glasgow-easter

2. See 1.
http://www.dailymail.co.uk/news/article-2027223/Migrant-jobs-boom-Were-chance-saloon-claims-Iain-Duncan-Smith.html

"But the latest figures suggest that not only have immigrants taken all the jobs created in Britain over the past year, but they have pushed nearly 100,000 British people out of the workplace and on to benefits.

3. No, See zero bound interest rates. QE etc

4. Yes, Especially on people.

5. None..
Myth 1: They are lazy and don't want to work.
Myth 2: They are addicted to drink and drugs
Myth 3: They are not really poor
Myth 4: They are on the fiddle
Myth 5: They have an easy life.
http://www.dunedinmethodist.org.nz/articles/view/the-lies-we-tell-ourselves/
http://www.jointpublicissues.org.uk/wp-content/uploads/2013/05/Truth-And-Lies-Report-smaller.pdf

6. Self Harm, Suicide, Starvation...
http://24dash.com/news/central_government/2015-05-18-DWP-reveals-sanctions-link-to-one-in-five-benefit-claimant-deaths

http://politicalscrapbook.net/2012/11/iain-duncan-smith-tells-bereaved-13-year-old-kieran-mcardle-to-go-to-the-jobcentre/

http://www.mirror.co.uk/news/uk-news/killed-benefits-cuts-starving-soldier-3923771

http://www.theguardian.com/society/2014/oct/23/missing-million-over-50s-unemployed-prince-charles

"As many as 1.5 million people aged 50 and over involuntarily left employment over the last eight years due to a combination of redundancy, ill health or forced early retirement, according to the research"

http://www.thepeoplesassembly.org.uk/author_of_the
"Britain on the sick (Dispatches, Channel 4, July 31, 2012) and Disabled, or faking it? (Panorama, BBC, July 31, 2012)

Dispatches reporter Jackie Long stated: “[We have] uncovered evidence that a tough regime of tests is secretly trying to push almost 90 per cent of these claimants off the sick, to look for work.”"

http://www.expressandstar.com/news/2013/04/10/could-you-live-on-53-a-week/

https://kittysjones.wordpress.com/2014/05/15/iain-duncan-smith-used-false-statistics-again-to-justify-disability-benefit-cuts/

On a lighter note:
https://en.wikipedia.org/wiki/Strikebreaker_%28short_story%29

[Mark]

I'm with Phil on the point about Dunn - and although Dunn's LSE piece doesn't drum to mention it on a quick scan, in his Thinking Allowed interview He said that pickiness was assigned with education - people with degrees held out for better jobs, which makes sense especially as my understanding is that people who fall down the wages ladder generally have a very difficult time getting back up.

Which makes taking that "shit job" a harmful action in the longer term.

[NoniMausa]

Sometimes I think of the unemployed and unemployable as leeches. But in a good way.

When someone is suffering from poor circulation, leeches may be attached to their extremities to draw healthy blood down into those extremities and allow at-risk fingers and toes to become healthy again. In the absence of the leech treatment, those extremities can die, and their decomposition poisons can in turn spread to parts of the body which were previously not at risk. In the worst case, a problem that began with one baby toe can end in death for the whole body. Not through malice, but as a side effect of being undernourished and then dead.

Of course, the metaphor is a bit tricky. The social service recipient "leeches" are not, of course, foreign to the body politic, but a part of it -- toe and leech at the same time, depending on whether they are part of the circulation or not. Many other things could take on the leech function -- for instance, a guaranteed income system, or one of Krugman's alien invasions. Extremely active organized crime could, perhaps, take up some of the leech-slack, also.

What the right wing doesn't say aloud, but appears to believe, is that the most peripheral circulation of public goods SHOULD be constrained, and signals of distress from those peripherals SHOULD be ignored. If those toes had any sense of shame they would just die and fall off, since (at least in western nations) it's not permitted to just cut them off.

You could reasonably label this "economic leprosy."

[Kaleberg]

Re: "What's the mechanism whereby the demand for labour increases to meet the increased supply? One possibility is that wages get bid down."

Are there any actual examples of an employer hiring more people than are needed to do the work because they can pay lower wages? Just about every employer I've ever seen or heard of would simply pocket the difference.

Your post actually makes some sense, but this kind of assertion makes me wonder.

[rogerh]

Mainly I agree - much heat and little light on benefit spending. Harder than it looks to create good jobs.

Right now we seem to be shedding people, first it was the manufacturers then the bankers and now at last the HR scam seems to be ending. The key is we don't need many people to run the show. So do we keep pseudo jobs or pay a citizen's wage - comes to the same thing really. The key to declining productivity numbers is to cancel the pseudo jobs - but that leaves an embarrassing 'people we can't find a use for' statistic. Might concentrate minds though.

[BCFG]

"The key to declining productivity numbers is to cancel the pseudo jobs - but that leaves an embarrassing 'people we can't find a use for' statistic."

In a rational world increases in productivity would mean a sharing of work rather than consigning people to be a 'people we can't find a use for' statistic.

But in this crazy system the tendency is to overwork some and under work others.

I think aragon and NoniMausa have it correct, this is about getting the 'sick' back to work and about the weak going to the wall where only the 'fittest' survive. The current Tory government are the wet dream of the Tory boys who since the early noughties have been doggedly taling about gold plated public sector pensions, welfare cheats and sick people taking the piss out of all of us. You have to hand it to them, their stupid idiocy found an opportunity and a vehicle!

[AJC]

Chris,
It`s a pity you didn`t mention the deliberate use of unemployment to control inflation, embodied in the NAIRU doctrine.

We live in an age when the unemployed are smeared by the media while the Bank of England governor can say he will consider raising the base rate when unemployment falls to 7%!!

Politicians are able to demonise the unemployed at the same time as technocrats can express fears that unemployment is nearing a threshold below which it would be at an "unsustainably low" level.

The reserve army of labour delivered to capitalists by central bankers is a gift to right-wing academics like Dunn, who can play on public ignorance of just how much unemployment is deliberately maintained through monetary policy.

https://thetruthaboutunemployment.wordpress.com