Sunday, June 26, 2011

Unemployment Compensation - 5 Myths

Last week, a special session of the Arizona legislature refused to change the law that would have continued unemployment compensation for 99 weeks. Instead, benefits will now end after 79 weeks.

The Arizona Republic this morning has an editorial talking about 5 supposed myths that the legislature apparently believes about unemployment compensation. In contrast, they offer their view of "reality." From an economic standpoint, allow me to provide an alternative view of reality.

- Myth: Arizona's unemployment benefits are a disincentive to work.

- Reality: Our state pays the second-lowest benefits - only Mississippi is lower. The maximum weekly check, $240, is almost 20 percent below minimum wage.

While unemployment compensation in Arizona is indeed low, it still acts as a disincentive to getting a paying job. Note that there is a spike in the number of unemployed workers becoming employed the week after their benefits run out.

- Myth: People could find jobs if they were motivated.

- Reality: There are far more applicants than jobs. Nationally, the ratio was nearly 5-1 in April. When McDonald's had openings in Arizona, there were more than 10 applicants per position. The state's job growth is expected to be anemic this year.

The JOLTS report does indeed show that there are 4.6 unemployed people for every open job. It also shows that 1.86 million people voluntarily left employment in April and a total of 3.97 million workers were hired.

- Myth: People are refusing to go down the career ladder or take lower-paying jobs.

- Reality: The barrier is at the other end: Employers are reluctant to hire older, overqualified workers when they have plenty of others to choose from.

Employers only hire people when they believe that the cost of hiring them will be less than the value of what they produce in the marketplace. Failing to hire someone that will make you money reduces your profit and is not rational. In addition, employers will hire the people that make them the most profit. If your required wage rate makes you less profitable than someone else, then you probably need to adjust your expectations.

- Myth: Refusing these federal funds is a good strategy to help fix the national deficit.

- Reality: One state unilaterally rejecting a badly needed short-term program - extended benefits expire in December - is not part of any rational plan to tackle the very real problem of federal spending.

How is spending additional federal money, every dollar of which must be borrowed, any part of a rational plan to deal with the deficit? When you have a spending problem you need to start somewhere. When the problem is as large as it is with the federal government today, it appears to me that we need to start everywhere.

- Myth: The rest of us aren't affected.

- Reality: The money from extended benefits gets spent immediately on basic needs such as food, rent, utilities and gasoline - supporting workers and circulating through the entire economy.

In this case, I agree that the rest of us are affected. So the good news is that the unemployed will spend the money with the rest of us. But where did the money come from? That's right, from the rest of us in the form of current and future taxes. So yes, we are all affected.

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