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.

Sunday, June 19, 2011

Higher Education - Investment or Consumption

I've contended for a long time that higher education is both an investment good and a consumption good. The portion of higher education that generates an economic return over time is an investment. What doesn't looks a lot like consumption.

Tuition and other fees keep going up faster than inflation. The CPI for tuition is 594 while the overall CPI is 225. That means $100 in tuition in 1983 now costs $594 while on average $100 expenditure in 1983 now costs $225. The question of course is why the discrepancy.

A news story on ASU's new "investments" provides a clue.

As soon as David Anaya moved onto Arizona State University's West campus his freshman year, he bought a box of Lucky Charms cereal, sat in his room and ate the entire contents in one sitting.

"My mom would never let me have it growing up," he told about 100 people who gathered last week to break ground for a new residence hall on the West campus.

Anaya's tale may sound trivial, but it bolsters the concept behind "academic villages" that will rise on ASU's West and Polytechnic campuses in 14 months. By living in residence halls and eating together in dining rooms, the freshmen of 2012 will experience what ASU President Michael Crow calls "immersion" education.


As another lure, students on all four ASU campuses will find glossy new recreation centers within the next few years. The need is strong enough that students agreed to "assess" themselves an extra $150 a year to pay off $25 million bonds for each project. Basketball courts, gymnasiums, outdoor pools and multi-use rooms for yoga and ballet were among the desired amenities.

As administrators have discovered, young adults today have raised the standards for acceptable campus living.

These sound a lot like consumption goods. Just to put the extra fee into perspective, $150 will buy you 2 credit hours of courses at Mesa Community College.

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Friday, June 03, 2011

Supply and Demand in Illegal Markets

Just finished the first week of summer session by covering the chapter on supply and demand. This post by Megan McArdle documents an interesting case of an increase in supply.

Mr. Stevens said stolen credit cards usually sold for about $5 to $10 online, yet the prices vary based on the amount of information supplied with the card data and the account limit.

Hackers who claim they are responsible for the Sony breach wrote on underground forums last week that they had access to over 2.2 million credit cards. If these millions of new stolen cards were sold online, the price could fall to well below the standard rate to as low as $1 or $2 each.

I like to point out to students that just because something is illegal doesn't mean there isn't a market for it. Being illegal merely raises the opportunity cost.

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