The expiration of unemployment benefits for an estimated 70,000 long-term unemployed North Carolinians has garnered national attention, even receiving the ridiculously shrill label “war on the unemployed” by New York Times
partisan hack economist Paul Krugman.
Krugman’s article, per usual, includes a bevy of economic fallacies, but I want to address one line of thought in particular. Krugman creates a strawman argument, that conservatives want to “punish” the unemployed and believe that unemployment benefits accord recipients a life of luxury. Krugman then debates the strawman that he just invented:
Is there anything to this belief? The average unemployment benefit in North Carolina is $299 a week, pretax; some hammock. So anyone who imagines that unemployed workers are deliberately choosing to live a life of leisure has no idea what the experience of unemployment, and especially long-term unemployment, is really like.
Following this line, Krugman himself even admits that “unemployment benefits make workers a bit more choosy in their job search” and therefore slows the labor market’s readjustment process. But this self-contradiction does not slow Krugman down.
In any event, Krugman’s line of reasoning here seems to be that conservatives believe $300 a week is a “life of leisure” and that comfy lifestyle is the reason the unemployed don’t try harder to find work.
Krugman, of course, is wrong.
In reality, those stating that unemployment benefits slow the labor market’s adjustment process recognize the basic economic law that humans make decisions on the margins. That is, they evaluate the cost or value of the next additional unit of something and let that guide their decisions.
Take the unemployment example: its not that the unemployed are deciding $300 a week is comfortable in isolation, or even comparing $300 per week in benefits versus getting a job paying, say, $25 or $30k. Instead, they evaluate the marginal benefit of losing the unemployment benefits and getting a full-time job.
To illustrate, say John is collecting $300/week in unemployment benefits. That amounts to $15,600 per year, tax free. John is considering working full-time, and available opportunities pay $28,000 per year. Let’s say payroll, federal and state taxes take 10% of that, bringing John’s take-home pay to $25,200.
At first glance, John would appear to be foolish not to take the job as it amounts to nearly $10k more in income. But remember that John will make a decision on the marginal benefits and costs of this move: that is, the marginal benefit may be nearly $10, but the marginal cost will be 40 hours of his time every week (i.e. working 40 hours vs. working 0 hours he works currently). So in essence, the marginal benefit to John taking the job would amount to less than $5 per hour (the additional $9,600 in income divided by 2,050 work hours in a year.)
Who would rationally decide to give up 40 hours of their time for a marginal benefit equaling less than $5 per hour?
So Krugman is wrong to characterize people who recognize that unemployment benefits slow down labor market adjustments because they believe unemployment benefits are so lavish. Instead, we understand the irrefutable economic law of marginal utility to realize that the unemployed are responding rationally via marginal analysis to continue on unemployment rather than accept offers with such a paltry marginal benefit.