As has been pointed out more than once near the entirety of the social sciences is either obvious or trivial – the exception being Ricardo on comparative advantage. This would mean to a mathematician that none of the social sciences are interesting – as they weren’t to the mathematician who asked the original question. However, there’s still value even if it’s not quite as great as the answer to how to cut pizza – piearesquared.
If we limit ourselves to economics, clearly the only one of the social sciences with any value, it’s not so much whether an effect exists or not which is important. The usual thing we want to know is which of many predominates?
Think of the Laffer Curve. It’s made up of the income and substitution effects. Maybe I’ve got some nut that I need to make from my labour. If wage rates go down – say, net wage rates as a result of a tax increase – then I might well work more in order to gain that nut. Inexperienced taxi drivers appear to do this, perhaps other piecework workers. Equally, it’s possible that I apply some value to the time I can go fishing. If wage rates drop below that value – as a result of a tax rise – then perhaps I’ll go fishing instead. That is, a tax rise can lead to either more labour hours or fewer.
We’re really pretty sure that neither effect happens to all all the time, that everyone does either or both at least a bit of the time. The Laffer Curve is the aggregate over the studied population of both. It’s not whether either exists, it’s which predominates.
So, to unemployment insurance. It could be that the existence of it means that workers are a little more adventurous about employment. Knowing that there’s a backstop leads to a little more risk taking. Could be that once they’re getting it they just lie there on the couch all day. And any other story that could vaguely be fitted into the circumstances:
For decades, policymakers have debated whether unemployment insurance provides a critical safety net during tough times, or whether it prolongs joblessness by reducing people’s incentive to find new work.
The answer is yes.
Yes, it’s a critical safety net, yes it prolongs joblessness. Which doesn’t really get us anywhere as what we want to know is the balance. The cost of the prolonging is higher or lower than the benefit of the backstop? We know both values are true, we just don’t know what they are and thus their relation to each other.
But, to answer this question, researchers need a clear measure of how much effort people are actually making to search for jobs. And this activity has proven difficult to track. That is why Scott R. Baker, an associate professor of finance at the Kellogg School, turned to Google—specifically, to its data on search traffic.
OK, we can see what they’re going to do. Different states might have different rules on when unemployment insurance runs out, let’s look at when search traffic for “jobs” peaks in relation to that. Given that we’ve those different end dates, and also that we’ve just had a big shock to the economy – you know, that recession thing – we’ll be able to work out something or summat.
Economists have argued the costs and benefits of unemployment insurance since its inception during the Great Depression as part of the Social Security Act of 1935. “There’s always a question in economic policy that boils down to the discussion of two competing forces,” Baker says. “One is the liquidity effect, which serves to make the unemployed better off by redistributing money to people at a time when they need it. The other is moral hazard. It’s the idea that the more you support these programs, the more people will take advantage of them and not find new work.”
Entirely and absolutely so. We want to know the balance. Of course unemployment insurance existed long before this, the British Friendly Societies were providing it perhaps a century earlier. But that was in small groups where all knew each other. As Elinor Ostrom pointed out, social or even societal pressures regulate that in a manner that a larger and impersonal society cannot.
Their results reaffirmed earlier research showing that people search more for jobs when they have fewer weeks of benefits remaining. In fact, they found that in areas where the average unemployed person had fewer than 10 weeks of unemployment insurance remaining, the index revealed 66 percent more search activity than in nearby regions where people averaged 10 to 20 weeks remaining—and a whopping 108 percent more than in metro areas in which the unemployed averaged 30 weeks left.
OK, we knew the general answer now we’ve more specific details of the size. And now?
Translated, that means “there is a moral hazard story to be told here, but we also show that the aggregate effect seems to be relatively small,” Baker explains. “If you’re looking to compare how much the overall increase in joblessness [during the Great Recession] could be driven by the increase in unemployment benefits, the answer is very little.”
Well, yes and no, yes and no. The one thing the US has traditionally had very little of is long term unemployment. On the basis that it doesn’t have long term unemployment benefits, as most of Europe does. Yet this past recession did indeed lead to a significant rise in that long term unemployment. And long term unemployment is very much more difficult to get out of than short term.
The next area of research really should be to look at this:
Ah, OK, doesn’t seem to have made much difference then, does it? Note that this is number of people, so the constantly rising base line is a reflection of the increasing population of working age here.
So, unemployment insurance does increase the period of unemployment but not much. And we’d really rather prefer that the unemployed not be destitute and die in the street the week after GM’s body count reduction. Even if only on the basis that we’d prefer to be without the bloody revolution that would follow. So, unemployment insurance, in principle, worth it.
Yes, OK, still trivial, still obvious, but nice to prove these things, nu?