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Incentives to work

Michael Strain at National Affairs has a long article in which he proposes “A Jobs Agenda For the Right.”  Much of his effort is devoted to getting conservatives comfortable with smart, limited macroeconomic stimulus spending, rather than opposing all such spending on principle.

For example, he puts in a good word for “infrastructure” spending, albeit not on the scale of jaw-dropping madcap spending President Obama is constantly demanding.  I would suggest Strain is unlikely to get the smarter infrastructure investments he wants until after he gets the right-to-work reforms he also calls for, since in the current political environment, infrastructure money has a way of ending up in union slush funds, rather than stimulating job growth.  And while it certainly does create short-term jobs when a big road or rail project is undertaken, the long-term growth of business opportunity based on transportation investment is more difficult to demonstrate.  To put it somewhat crudely, there isn’t much compelling evidence that businesses will sprout once better roads lead to barren economic fields.

But there are many other ideas in Strain’s article, including a few that would be very provocative, if Republican political muscle were put behind them.  For example, here’s what he says about unemployment insurance reform:

Conservatives should also consider some creative reforms of the unemployment-insurance system. Giving unemployed workers a modest cash bonus when they secure employment has been shown to be effective in shortening the length of unemployment spells, and, if targeted at workers who have a high probability of exhausting benefits, it can actually save the taxpayers money in the long run. It seems implausible that a re-employment bonus would have a large effect on long-term unemployment, but evidence suggests that it would help in addressing shorter unemployment spells.

There is also some evidence that giving out lump-sum unemployment benefits may be preferable to the current system of weekly checks. Under traditional unemployment insurance, a worker forgoes his unemployment benefit by taking a job. Lump-sum unemployment insurance may be beneficial because it would mitigate the weekly-check system’s incentive to delay starting a job. With lump-sum unemployment benefits paid, say, every month rather than every week, a worker who got a job at the beginning of a pay period could take in both unemployment compensation and a paycheck for that month. If this gets workers off unemployment faster, then the program could save money over traditional unemployment insurance.

Whatever grumbling these proposals might elicit from fiscal conservatives, they’re nothing compared to the howls of tortured ideology that would emit from the Left.  We are emphatically not allowed to speculate that some measure of our chronic unemployment problem is due to unemployed persons exhibiting something less than unstoppable zeal in their quest to find work.  We are not allowed to wonder if some people make a coldly logical decision that the unpleasant business of work is not worth the incremental improvement in a government-supported standard of living.  As Strain notes, under the current rules, taking a job can represent a short-term loss of disposable income.  Would more people push harder to find employment if there was a cash incentive for doing so?  More to the point, would that make a difference for a lot of unemployed people?

Liberal economic theories always underestimate the power of incentives at the margins.  That’s why they tend to think of minimum-wage increases as an unalloyed social benefit, without understanding how increased labor costs choke off entry-level opportunities.  Perhaps those forces have relatively little effect on the well-established professional with a long, solid resume, who would never consider subsisting on unemployment and welfare benefits for a moment longer than absolutely necessary, but they do influence both the offer and acceptance of jobs further down the scale.

If a proposal such as Strain’s “modest cash bonus” and monthly unemployment payments had a significant beneficial effect on the job market, the resulting shockwave would be devastating for liberal dogma, which treats unemployment as entirely a product of private-sector corporations failing to offer enough jobs.  You may recall that one of the tried-and-failed nostrums from the big-money days of Obama stimulus mayhem involved giving employers a bounty for every person they hired.  Given the investment of time and money involved in hiring someone – a relationship both employer and employee generally hope will last for years – this was like trying to stimulate marriage by offering a taxpayer subsidy for wedding rings.

The Left becomes very angry when confronted with the idea that some measure of blame for our long, grinding unemployment nightmare comes from the labor supply.  Another criticism they don’t want to confront is the role played by our substandard education system, which costs both students and taxpayers staggering amounts of money, but leaves us with young people who require expensive retraining before they can contribute to the workforce.  A good deal of that retraining comes through the university system, which saddles young people with six figures of debt to teach them what previous generations learned in high school.  Strain advises automatic citizenship for immigrants who earn advanced degrees at American universities, which is not at all what most of our dominant political culture means when it discusses “immigration reform.”  Granted that this relatively small group of highly educated, highly skilled immigrants are likely to turn a profit for American society if offered a fast track to permanent citizenship… but if importing such high-skilled labor is a key economic stimulus proposal, then should we not ask why the very large population of native-born university students isn’t producing enough top-tier professionals to fill the American economy’s needs?

Another proposal for fine-tuning employment at the margins comes in the form of a “sub-minimum wage,” designed to overcome the demonstrable handicap of long employment gaps on the resumes of job seekers.  Part of our workforce malaise comes from the death spiral of long-term unemployment making the applicant look less appealing to employers, a phenomenon that has been confirmed with recent academic studies.  Strain’s solution:

Why would a firm pass on a worker just because he happens to be unemployed? Firms can glean very little information about a worker from his résumé. Is the worker collegial? Conscientious? Reliable? Punctual? How long will it take the worker to ramp up and learn the job? In the face of all that uncertainty, and with many more job applicants than vacancies, firms can be scared off pretty easily from hiring long-term unemployed workers. In addition, firms may be less concerned about the fact that a worker was laid off than about the fact that no one else has yet hired that worker, inferring that other firms detected a problem during the interview stage.

For the more than 4 million long-term unemployed workers in the United States today, it is likely that some combination of all these factors is at play. Their lengthy unemployment spells are making it even harder for them to find work. Their skills are atrophying. They are trying to switch occupations and industries, but no one wants to give them a chance.

What can we do to help them? One promising reform might strike many as counterintuitive: Let firms pay them less.

A firm considering whether to hire a long-term unemployed worker has to form a judgment on how productive the worker will be. The firm will then want to match the wage it offers to the worker’s expected productivity. But what if the firm thinks the worker will produce only, say, $4 per hour of goods and services? After all, the worker has been out of work for over half a year and has lost valuable skills. And the worker may be trying to switch industries or occupations, and likely will not be very productive in his new role for at least a few months. If the firm thinks the worker will be able to produce only $4 an hour, will the firm pay the worker the federal minimum wage of $7.25 per hour? Of course not.

What if the firm is genuinely uncertain? The worker looks good — the firm thinks that after a few months he could be pretty productive — but the firm considers the worker a big risk. If the firm could pay the worker $4 per hour on, say, a four-month trial basis, then it would be more likely to hire him. But the federal minimum wage prohibits this. So the worker remains unemployed.

That’s another aspect of minimum wage law that contradicts liberal dogma.  They don’t understand what a risk job offers represent for the employer.  Risk has a monetary value.  Higher minimum wages make the risk of inexperienced or potentially unreliable employees unacceptable.  If Strain’s sub-minimum wage proposal was adopted successfully, it would detonate a great deal of the rhetoric that masks the naked appeal of minimum wage increases as an easy way for politicians to buy votes with other peoples’ money.  Strain would support these sub-minimum wages with an expanded Earned Income Tax Credit or wage subsidy, essentially using a temporary government welfare payment to sustain workers through their sub-minimum period.  That’s more honest than using minimum-wage laws to draft employers into service as de facto welfare offices.

Our political argument over minimum wages and entry-level employment often confuses entirely different groups of people, mixing first-time job seekers in their teen years with older workers struggling to support families.  Strain suggests lowering the minimum wage for young people permanently, giving employers an incentive to take chances on new workers, and developing a “professional network” to teach them good work habits, the way apprenticeship helped young people in times past.

It would be very challenging to ask our current political culture to accept that any significant part of the unemployment crisis is due to wrong-headed government policies, perverse incentives, and the choices made by those at risk of dropping from the workforce completely.  There is a nearly evangelical belief that social safety nets do not dramatically reduce anyone’s incentives to find work.  Recent “stimulus” efforts have been ostensibly focused on influencing the behavior of employers (and, in practice, tended to vanish down yawning chasms of graft.)  Are we ready to try trimming government regulations and the business tax burden back, to create more opportunities and make them easier to exploit, while giving the long-term unemployed more incentives to find and exploit the opportunities that come to them in turn?

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