Unemployment compensation is taking a beating these days. But unlike the 1960s when 70 percent of workers qualified for unemployment compensation, the percent qualifying for unemployment compensation today is closer to 30 percent, with some states like North Carolina and Florida averaging only 10 percent.
Conservatives are relentless in their claim that it’s the overly generous federal benefits that are causing many people to drop out of the labor force rather than accept a job. As evidence they cite that fact that there is 8.1 million job openings, while the unemployment rate is only 6.3 percent.
But this comparison is misleading, the job openings are expressed as an absolute number, while the unemployment number is a percent of the labor force. If we look at the actual number of unemployed people in April we find that it was 9.8 million, when you add in marginally attached workers, discouraged workers and the involuntary part-time workers, the real number of unemployed individuals is closer to 15.4 million.
Even the 8.1 million job openings is misleading. Are the job openings in areas with low unemployment levels, if so, shouldn’t we expect the openings to go unfilled? Are the jobs full time? Part-time work is of no use to those with families. In a market economy, the wage rate for a job vacancy should be viewed as the initial offer in an ongoing labor negotiation. If the firm finds no takers, it simply means that the wage rate is too low. If firms are serious about filling a vacancy, they may need to up their offering wage.
But this debate over job openings and unemployment compensation misses the point. Unemployment compensation is both useful and desirable. We want our labor markets to be efficient. We want people to continue to file for unemployment compensation while still searching for a job that is a good match with their skills. We don’t want to force them to take the first available job. This job search maximizes not only a worker’s potential income, but also the output of the nation as measured by GDP.
Critics assume that all unemployment is the same, but there are four distinct types of unemployment and the remedy for each is different. Failing to take this into consideration will lead us to make decisions that show up as either ineffective or inflationary.
Some workers are seasonal. Construction work in the north slows down considerably because of cold weather. Raising aggregate demand won’t put them to work, and denying them unemployment compensation is needlessly cruel, since employment will return when the weather improves.
Other workers are structurally unemployed. The changing structure of the economy has rendered their job skills obsolete. In this case the remedy is retraining, but this takes time. Unemployment compensation affords them the ability to pursue education or training, without it they would be forced into any job low pay job just to survive. This is not only a waste of labor, but is again needlessly cruel.
Many workers are cyclically unemployed. These workers are out of work because of a drop in demand for their company’s product. In the overwhelming number of cases these workers return to work when demand returns. In this case fiscal policy is the preferred remedy, boosting demand is the surest way to re employ these workers. Forcing them to take alternative employment is disruptive to all firms if (when demand returns) workers leave their new employment to return to their original employer, which is almost always the case since we see few cases when quickly found employment pays more than the worker’s original job.
And lastly, we have frictional unemployment. These are workers’ who are entering the labor force for the first time, or have voluntarily quit their job to find a better one. This type of unemployment is beneficial to the economy, not to mention the individual. We want workers to find jobs that fit their training, or better jobs that can provide a higher standard of living. Eliminating unemployment compensation, or making it unreasonably short, simply short circuits the process forcing the workers into a job that is not in his best interest or the best interest of the nation.
Simply put unemployment compensation is an extremely valuable tool. It’s mere presence helps minimize the depth of any recession, and provides vital financial support to the families of those who are unemployed.
The financial support aspect of unemployment compensation cannot be over emphasized enough. Recent Fed studies have shown that a majority of families cannot afford an expenditure that is in excess of $400. Given what we know about the benefits of having a robust unemployment compensation system, it’s incomprehensible why so many states are abandoning their own workers.