Wednesday, April 22, 2020

Mitigating moral hazard -- unemployment edition

As Kurt Huffman, restaurant owner, writes vividly in the WSJ, concerns that unemployment insurance paying more than wages might induce people to stay home even when jobs are available  are not just scare stories told by heartless free-market economists.
 ...we realized that we needed to hire back some of our staff to help with the demand. That proved harder than we expected.
We started making the calls last week, just as our furloughed employees began receiving weekly Federal Pandemic Unemployment Compensation checks of $600 under the Cares Act. When we asked our employees to come back, almost all said, “No thanks.” If they return to work, they’ll have to take a pay cut.
This has had the perverse effect of making it impossible for us to hire enough people even for our limited takeout and delivery business at a time of rapidly rising will persist at least until July 31, when the unemployment bonus expires. ...
The Trump administration is talking about setting a timeline for when the country can “open for business.” For my business, Congress has already locked down that date. We plan to open our dining rooms on Aug. 1, once the government stops paying people $15 an hour, on top of standard unemployment compensation, to stay home.
Hint to Mr. Huffman: I would not bet too much that this deadline is not extended.

Lars Ljungqvist and Tom Sargent long ago pondered the question why Sweden, with an apparently quite generous unemployment insurance program had so much less unemployment than, say, France. The answer, as I recall, is that Sweden had a bit of stick with the carrot: if you got offered a job, you had to take it or lose unemployment insurance.

It's in Ljungqvist, Lars and Thomas J. Sargent. ”How Sweden’s Unemployment Became More Like Europe’s” in Reforming the Welfare State: Recovery and Beyond in Sweden, eds., Richard B. Freeman, Birgitta Swedenborg and Robert Topel. Chicago: University of Chicago Press, 2010, one of many great papers Lars and Tom wrote on unemployment insurance.  I don't have a link to an online version.  p. 191:
"The Swedish government was exceptional among European countries in intervening in workers' search processes by monitoring them to make sure they accepted job offers that the government deemed to be acceptable. "
A similar idea might make sense to get the US going again. Our unemployment insurance has been extended from those fired to those furloughed. Surely if your employer says "we need you back now," the extra Federal unemployment insurance that pushes wages above replacement for furloughed workers can cease.


  1. This is already something most states do:

    1. This. The article from the WSJ is simply wrong about how unemployment works. Leaving this post up without editing it to clarify this misunderstanding is irresponsible.

  2. Ljungqvist, Lars & Sargent, Thomas J., 1995. "The Swedish unemployment experience," European Economic Review, Elsevier, vol. 39(5), pages 1043-1070, May. Related, Ljungqvist and Sargent, "Welfare States and Unemployment, Economic Theory · February 1995" (this was uploaded by Sargent on Research Gate website).

  3. My younger brother has a union machinist job at Boeing and even he was making more money with UI + $600/wk while furloughed. He did go back to work yesterday, however, because they called him back. I imagine turning down offers to return to work is more common in service industries where there are less ties to individual employers than just the industry as a whole. My brother isn't exactly going to walk away from Boeing and just magically find another machinist job in Everett, WA.

  4. See also Ljungqvist, Lars & Sargent, Thomas J., 1998. "The European Unemployment Dilemma" The Journal of Political Economy, Vol. 106, No. 3, 514-550.

    A phenomenal paper.

  5. People go back to decent jobs. Of course people don't want to go back be a cook, waiter, dishwasher, or grocery clerk while they are paid more not to. These type of jobs will always be there.

    Same story with fruit pickers and meat packers. Mostly undocumented because the pay to work ratio is too poor even for the least capable american.

  6. I think of of your readers' comment, sadly, renders any hope of applying Swedish standards to our American political system will not work. One of our two main parties believes that they get to define what is a job and what is exploitation. And they feel so strongly that they are prepared to make it a national standard.


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