2013-12-19

Sober Analysis

The mark of a deep thinker is his or her ability to avoid letting strong emotions get in the way of a calm and patient analysis. Otherwise, the tendency is that emotions can get the better of a person.

Suppose labor force participation dropped in the wake of a reduction in employment benefits. A left-leaning person experiencing strong emotions over the plight of the poor would be inclined to conclude that reducing social welfare payments to unemployed persons results in a loss of real wealth, in the form of a shrinking workforce. "Correlation does not equal causation" does not quite encapsulate the problem here.

There is, in fact, no reason to "suppose" the above example. In a recent Bloomberg article, Evan Soltas reports just such a thing. (Hat tip to Tyler Cowen.) The most interesting part of Soltas' piece is this excerpt:
In addition, North Carolina’s labor force began to shrink. The state is experiencing the largest labor-force contraction it's ever seen -- 77,000 fewer people were working or searching for work this October than a year ago. This should, but won’t, settle a partisan debate. Cutting unemployment insurance apparently hasn’t encouraged the unemployed to look harder for work: It has caused them to drop out of the labor force altogether. 
To get unemployment insurance, you have to actively search for work and prove that you're doing so. The drop in the labor force suggests that this incentive was effective. Without it, more people just give up.
I haven't verified the numbers Soltas reports in his piece, but I have no reason to question them. Let's take them at face value.

One fact stands out more than all others in my mind: The only thing keeping these folks in the workforce was welfare. Without those welfare payments, they gave up looking for work entirely. On its face, it sounds pretty bad. But if we actually take the time to consider what this actually means, the picture changes a bit.

First of all, recipients of unemployment benefits do not have jobs. That fact doesn't change, no matter what. If their benefits were increased or decreased, or left unchanged, they would still not have jobs. Thus, if we take Soltas' reporting at face value, there is no reason to conclude that any change to unemployment benefits has had (or will have) a serious impact on the number of people drawing employment checks.

Let's pause to emphasize that point to you conservatives and libertarians who are inclined to argue that the reason people aren't working is because unemployment benefits are so extravagant. Clearly, North Carolina's experience negates that viewpoint. These welfare recipients didn't get jobs when their benefits ran out; they stopped searching for work altogether.

Yet, that being true does not bode well for the liberal position, either.

The rationale for unemployment insurance is supposed to be that we are supporting a good man or woman who has lost a job while that person looks for a new one. If a good person struggling to make ends meet needs a few months' support to prevent himself/herself from losing an apartment or car, society could conceivably benefit from bearing a small burden to avoid a comparatively larger loss in wealth to the resulting "under-employment."

Note, however, that Soltas reports neither under-employment, nor an increase in homelessness. Liberals' worst fears were not realized. Instead, what's happening is that people are exiting the workforce when their benefits run out... and they are mysteriously "just fine." I put "just fine" in scare quotes because clearly someone who was once getting a paycheck, and then a welfare check, and now receives no such income, is certainly worse-off than before.

But if such people needed employment to survive, and are exiting the workforce, what we expect to see is an increase in the death rate. We're not seeing that. Instead, we're seeing people quietly exiting the workforce and making due without unemployment benefits. Presumably, they have somewhere to go. Either they have spousal support, or parental support, or non-employment income, or a home abroad, or something. One cannot simply stop working altogether. Something happens. There is a Step Two.

Understand, I'm not arguing that life is getting better for people who find themselves exiting the workforce. But on the other hand, if they're not dying, and rates of homelessness aren't increasing by exactly the same rate as the decrease in labor force participation, then we are talking about a group of people who have found a way to get by without employment income. That's not necessarily a tragedy.

One final point: I don't think Evan Soltas has ever been in line at the unemployment office before. There is a requirement that recipients be "actively looking for work," yes. But applying for jobs and making a serious effort to obtain a job are two different things entirely. I would never suggest that all welfare recipients are merely going through the motions in order to receive their welfare checks. But I'm not pretending it never happens, either. We'd expect those people to be the first ones to exit the workforce when the benefits run out.