Monday, June 26, 2017

Work and incentives.

Ed Glaeser has a thoughtful essay at City Journal, "The War on Work -- and How to End It.''

It is interesting that our political class says it wants more Americans to work. Yet there are few activities as hit by disincentives and regulatory barriers than the simple act of paying another person to do something for you.

With wide range and long historical perspective, Ed points out the slow decline in the fraction of the population working, especially prime-age men.
From 1945 to 1968, only 5 percent of men between the ages of 25 and 54—prime-age males—were out of work. ...As of December 2016, 15.2 percent of prime-age men were jobless  
These are "out of the labor force," not looking for work. We are arguably at a business cycle peak, with a low unemployment rate -- defined as those looking for work.
Joblessness is disproportionately a condition of the poorly educated. While 72 percent of college graduates over age 25 have jobs, only 41 percent of high school dropouts are working. 
Why? I'm not going to restate the whole thoughtful essay but the disincentives caused by safety net programs are a big part of the story:
...Social Security and unemployment insurance,  National disability insurance,  Medicaid and food stamps, housing vouchers... 
These various programs make joblessness more bearable, at least materially; they also reduce the incentives to find work. ... After 1984, though, millions went on the disability rolls. And since disability payments vanish if the disabled person starts earning more than $1,170 per month, the disabled tend to stay disabled. The economists David Autor and Mark Duggan found that the share of adults aged 25–64 receiving disability insurance increased from 2.2 percent in 1985 to 4.1 percent 20 years later.... 
Other social-welfare programs operate in a similar way. Unemployment insurance stops completely when someone gets a job, which may explain why economist Bruce Meyer found that the unemployed tend to find jobs just as their insurance payments run out. Food-stamp and housing-voucher payments drop 30 percent when a recipient’s income rises past a set threshold by just $1. Elementary economics tells us that paying people to be or stay jobless will increase joblessness.

The excellent "Panhandling in Downtown Manhattan: A Preliminary Analysis"  by Gwendolyn Dordick and Brendan O’Flaherty (HT Marginal Revolution) gives a particularly vivid example, Eli the panhandler:
Eli is severely disabled and confined to a wheelchair. He is a slight African-American man in his mid to late forties. He is unable to speak clearly. His uncontrollable twisting movements undermine his ability to maintain eye, but they do little to stop him from trying to let people see his somewhat toothless smile.
Eli is not homeless; he rents a small place uptown. Eli collects Supplemental Security Income (SSI) and Medicaid. Rent, food, utilities and transportation leave him little money for anything else, such as helping out his daughters every now and then, and making monthly payments for his cell phone(1) . [1 Eli bragged that since he switched carriers that he chopped close to $90.00 off his monthly bill.] 
Eli held regular employment in the past; he worked in a mailroom for two hours a day, but his hours are constrained by government regulated income limits. The more income Eli has, the less his SSI benefit will be. Furthermore, if his "countable’ income exceeds the allowable limit, he will lose his SSI benefits.(2)   [2 Countable income includes earned income from wages, from self–employment; unearned income, such as Social Security benefits, pensions, State disability payments, unemployment benefits, interest income, and cash from friends and relatives; in-kind income, for food or shelter; and deemed income from a relative (]
Some of the highest marginal tax rates in the US apply to people  like Eli. Wouldn't we rather see Eli working in the mailroom?

Back to Glaeser, an important point
Scholars Olivier Blanchard and Justin Wolfers have explained Europe’s persistent unemployment, which they called “hysteresis,” by the interaction of adverse economic shocks and extremely generous welfare states.
The fact that food stamps and disability have huge implied marginal tax rates does not affect people how have a job. Their disincentives kick in when people lose jobs, use the programs, and find it very hard to kick the habit.

Glaeser also mentions occupational licensing and other barriers to employment.

Glaeser mentions housing subsidies, but not their disincentive effects. I hope, as a top real estate economist, he comes back to this topic. Much of our safety net is tied to location. One reason people don't move to follow better jobs is that safety net programs don't follow them or family members well.

Housing subsidies are among the worst offenders. If you win an "affordable housing" lottery in one part of town, you can't afford to move across town or to another town to follow a better job. Or any job. Our government's subsidy of highly leveraged owner occupied houses has impoverished a generation of people who need to leave the factory town when the factory closes.

This is a tough nut. We want our government to target money to people who really need it. But we don't have infinite money. The answer has been to means-test programs, phasing out benefits as people get more income. The answer also has been to make programs somewhat of a pain in the butt, and not so portable. That discourages people who "don't really need it." Many Federal programs have take up rates in the single digit percentages. State and local administration of programs also discourages portability. Once you've gotten on Medicaid and found a doctor who will actually see you, moving once again gets harder.

The answer, I think is perhaps to spend more in order to spend less, and to limit benefits by time not by income; to focus on the incentives of programs not the amounts they spend. If there is less income phase out, the marginal tax rate is lower. The static cost seems larger, but if more people can move out of needing benefits, it may not be larger in the long run. If disability for back pain, say, was for 3 years only, integrated with health care for back pain, has no income limit, is transferable to a new place, we might see a lot more work -- people figuring out new occupations that don't hurt their backs too, more mobility, and in the end less expense.  Benefits need to be much  more portable, we need to let builders build apartments where people want to go.

More deeply, our government is quickly creating a legal class system based on income. You are a "low income person," for life, apparently, much as you once were a serf, tied to place, occupation and status. No. In America "income" should be, as it is, a temporary part of your life, low at times of misfortune, high at times of good fortune, and always beckoning. We are not a class society, but we are fast creating one by legislation.

The disincentive to work comes from the sum of all programs, not each one in isolation. The fragmentation of our programs makes the disincentives harder to see. Glaeser:
Consolidating social policies would be a crucial step. Struggling families now receive food stamps, housing vouchers, Temporary Aid to Needy Families, and other assistance—all of which punish work. If the various programs were combined into a single cash benefit, that benefit could be designed so that the tax on earnings never went above 30 percent. We could follow the lead of Norway on unemployment and disability insurance, allowing the disabled to keep, say, 50 percent of their benefit above the $1,170 threshold, while tightening the requirements for being designated as disabled. [Or, as I suggest, limiting the time] Unemployment insurance could be structured so that payments were no longer contingent upon staying completely out of work.
Reforming the incentives of social programs could be a bipartisan effort (if anything can be a bipartisan effort these days). We spend less, we help people more.

Reform is not impossible.
Twenty years ago, the more economically successful European nations, such as Sweden, Germany, and the Netherlands, reorganized their welfare states to emphasize work and witnessed positive results. Others, including France, Italy, and Spain, did not, and they have struggled. In a sense, the eurozone financial crisis of the past half-decade is the legacy of southern European countries that wouldn’t fix their failing welfare systems. The U.S. needs to decide if it wants to follow the path of Germany or of Spain.
"Socialist" Sweden turned out to be remarkably hard nosed about incentives. If they can do it, so can we.


  1. John,

    "Why? I'm not going to restate the whole thoughtful essay but the disincentives caused by safety net programs are a big part of the story: ...Social Security and unemployment insurance, National disability insurance, Medicaid and food stamps, housing vouchers... "

    Social Security Payments
    $900 Billion

    Last time I checked, no Social Security recipient is in the prime ages of 25 to 54.

    Unemployment Insurance Payments
    $20 billion

    Medicaid payments
    $600 billion

    Medicare payments
    $700 billion

    Interest on the Federal Debt
    $500 billion

  2. Glaeser, not Glaser.

  3. Interesting. It is without a doubt that the labor force participation rate for men throughout the last century has been declining and is projected to keep decreasing as the Bureau of Labor Statistics portrays here;

    With the progress of technology, it may be one thing that helps explain why the labor force participation for men has been steadily declining at least for young males. Now that the agricultural sector has a smaller role, many jobs require more skilled workers, thus requiring men to pursue higher levels of education which in the past may not have needed. Therefore, they are not included in the labor force participation rate for a few extra years. Along with technology change, and society's views changing a possible explanation of why we see in the same graph that while men in the labor force have declining numbers, more women are entering in. Now that most household jobs that women used to complete can be done with innovations that make it easier. It would perhaps make sense for men to now be the "Stay at home Dads" if the wife's expected income of working was higher than the males.

    Now the reasons above may or may not provide an explanation as to why some males are out of the labor force. But to your point, and Glaeser's I have to concur that prime age men and even women in America and some European countries seem to have some disincentive to work due to government welfare and unemployment insurance programs. Unemployment benefits increase the incentive not to work and help increase frictional unemployment as people are less likely to search for work. Perhaps to provide them an incentive to find a job those on unemployment benefits can be given a bonus if they find a job within a specified period. Spain like you mention is a prime example of a country that has had a high rate of unemployment due to its government and labor market policies. If the United States can find a way to reform the policies and provide assistance to those seeking jobs hopefully, we will see the labor force rate increase and unemployment decrease.

  4. I agree with the thrust of this post..but would add that the US needs to add positive incentives to work.

    First, a non-PC side note: There are also more than 4 million former federal employees receiving VA disability. This is not battlefield injuries, this is for almost any claimed disability incurred while being a military employee, including bad knees, bad backs, poor hearing, or the biggest one now, PTSD. Obviously, 4 million is a huge number given the base (in comparison, there are about 9 million SSDI'ers), and the VA disabled are often men in the 40s. A better solution is perhaps to eliminate the VA entirely, and offer one-time cash bonuses at end of federal employment in the military.

    That said, I would advise cutting both SSDI and VA disability rolls aggressively.

    2. As this chart shows, real median earnings for full-time employed males in the US are down from 1979. Mercifully, the chart does not go further back in time. We can expect less labor supply at lower wages. (We often hear that higher productivity leads to higher wages, but surely US male workers are more productive than 40 years ago. Yet real earnings are down).

    3. The labor share of income has been declining, by this metric:

    4. Property zoning continuously pushes workers away from employment centers, increasing the "cost" of working. Unzone property.

    5. The Fed says it regards "full employment" as a 4.8% unemployment rate, which works out to be about 1.5 people looking for work for every job opening. How nice. The SF Fed recently opined “The (national) labor market has further strengthened and appears to be at or even beyond full employment.“

    Yes, too many people are working in the US, says our central bank. Egads. BTW we have been below the Fed's 2% target rate of inflation since 2008 or so. Wages are famously dead. We need a job-growth oriented central bank.

    in conclusion, I prefer free markets, less dole.

    I think the right way to get there is to regard "labor shortages" as a feature, not a bug of macroeconomic policy. I would like to see robust growth in real wages, and that might encourage the voting public to select someone other than Sanders, Trump or Clinton.

    The track record of the last 50 years--lower real earnings, more dole, more costly housing, bigger trade deficits, more illegal immigrant labor--will not likely result in a free marketeer in the White House in 2020.

    PS Why not big tax cuts on wage income?

  5. Countries like Spain and Italy do not have a well equipped welfare state like Germany or Sweden. Therefore, relating the crisis in Southern Europe to not reforming the welfare state is probably a little far fetched - this does not mean that these countries do suffer from eigidities in their institutional framework, though.

  6. Arnold Kling has an idea worth testing he calls flexdollars. See:

    "The classic approach is the negative income tax. What I would suggest is a modification of the negative income tax, in which recipients are instead given flexdollars. These would be like vouchers or food stamps, in that they can be used only for “merit goods:” food, health care/insurance, housing, and education/training. One way to think of this is that it takes the food stamp concept and broadens it to include the other merit goods."

    Flexdollars would start at a high level for households with no income and then fade out at rate of 20 percent of the recipient’s adjusted gross income. This “fade-out” would act as a marginal tax rate on income, so we should be careful not to set the fade-out rate too high."


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