Originally Published: June 9, 2003 6:10 p.m.
Economics 101 tells us that if we pay people not to work, odds are pretty good they won't find jobs.
Econ 101 also tells us that if government makes employers pay a tax on every employee they hire, employers will hire fewer people. They teach the same lessons in Common Sense 101.
Unfortunately, Arizona's House of Representatives has voted to increase the state's Unemployment Insurance (UI) benefit amount from the current level of $205 per week to $240 per week.
But the bill carries no rider commanding God to suspend the laws of economics, so increasing the benefit amount will not have the predictable effect of causing more job seekers to sit out the job market. The upshot? Higher unemployment than we would have seen otherwise.
In case you're inclined to write off that Econ 101 logic as too theoretical, plenty of empirical evidence exists to back up common sense. A groundbreaking 1990 study in Econometrica found that the likelihood a UI benefit recipient will find a job more than doubles near the end of eligibility.
Moreover, a 1997 study in the Journal of Business and Economics revealed that job seekers who were not eligible for benefits found jobs in less than half the time as those who were receiving benefits. Those studies reinforce the economic reality that individuals respond to incentives. It makes sense that UI benefits will discourage a person's job search intensity to some extent, unless we build in another incentive.
Indeed, legislators should move in precisely the opposite direction and work to reduce or suspend the UI tax (the latter may require a change in federal law). Employers are responsible for paying the tax, but the economic reality is that employers pass on the cost of that tax to employees through lower wages. Indeed, by increasing the cost of labor, the tax shuts some would-be employees out of the job market altogether.
Reducing and working to suspend the tax are steps the Legislature can take immediately. A lower UI tax would mean a lower overall burden on businesses, allowing Arizona businesses to create more jobs, and better-paying jobs. In a recent Goldwater Institute study, economist Stephen Slivinski finds that suspending the UI tax for one year would create an estimated 116,000 new jobs, increase payrolls by $4 billion, and bring in $268 million in revenue for the state government.
Because the UI fund currently is running a surplus, increasing the benefit amount would not mean an increase in taxes. But Arizona should use the current surplus to suspend or reduce the payroll tax.
Beyond suspending or reducing the tax, legislators (both at the state and federal levels) should consider replacing the current, compulsory UI system with a competitive system. Proponents of the compulsory UI system believe that it is a necessary safety net, especially during an economic downturn. However well-intentioned this view may be, a competitive UI system would provide a more equitable payout to the unemployed, reduce the burden on employers and establish a proper incentive structure.
By allowing employers to choose between the traditional state fund, a private insurer, or a self-insured option (similar to how workers' compensation works now in many states), companies can choose the most cost effective plans while incorporating the specific needs of their employees.
For instance, an employer can find an insurer who will provide benefits regardless of whether the employee quit, was fired for cause, or summarily laid off. Some workers would see this is an important feature of their total benefits package and would be willing to accept a slightly reduced salary in exchange. Employers in high turnover industries would be able to join a high-risk pool. Meanwhile, the state could make the insurance fund available at a set rate for those who wish to stay.
Creating a competitive system of unemployment insurance is the ideal policy option, but it would require a change in federal law. The best short-term solution to unemployment is to reduce the UI tax across the board, creating new jobs and opportunities for the unemployed.
(Satya Thallam is a Fiscal Policy Researcher at the Goldwater Institute.)