Friday, May 12, 2017

Get the Data

The second problem that conservatives sometimes make is only look at the effects of a policy on laziness and hard work. But there are many more. Human nature and human society is extraordinarily complex things. The Law of Unintended Consequences holds that new laws or regulations will have many different effects beyond those which were intended. A policy cannot be judged until all effects have been accounted for.

Let’s talk about “job mismatch”. People who are out of work still have to pay the rent and make the car payment. And when they are unemployed, their health insurance gets a lot more expensive because their employer is no longer picking up the lion’s share of the cost, so a lot of people forego health insurance. That’s not a good place to be, particularly if you have kids. The upshot is that most workers don’t have the luxury of doing a long and thorough job search. They can’t realistically expect to find their dream job; they have to take the first half-decent job that comes along. That’s bad for workers because it means their job may not be as fulfilling, but it’s also bad for firms. If workers had the luxury of taking longer and more thorough job searches, then employers would have a larger pool of job applicants to choose from. That means that workers could be better matched with a job that fits their skills. That in turn results in a more productive workforce and a stronger economy. Unemployment insurance – a Big Government program – actually boosts productivity and makes the economy stronger. That what’s economists mean when they say that insurance reduces “job mismatch”. 

Job mismatch is just the tip of the iceberg. Unemployment insurance has many other effects. Take dual income couples. Having a second earner in the family provides another type of safety net. If you lose your job you can rely on your spouse’s health insurance and paycheck to get by. So unemployment insurance rewards single income couples who don’t have a second income to fall back on, so we expect an increase in stay at home moms and dads. Savings is another effect. Unemployment insurance rewards people who didn’t bother to save for a rainy day, so we expect unemployment insurance to result in lower savings. If you spent enough time, you could find dozens or even hundreds of different choices that will be impacted in some way by the presence of unemployment insurance. Most of these other effects are likely to be trivial, but a few of them might very well be significant. 

To sum up, liberals often make the mistake of only look at the intended consequence of a law. In the case of unemployment, that means the unemployed workers being helped. Conservatives tend to go one step farther and look at the unintended consequences on laziness and hard work. But smart liberals and conservatives go beyond this and look at all the plausible effects. 

Europe's (perhaps too) generous unemployment system is a great example. It was intended to reduce job mismatch and the "commoditization" of labor. Having unemployment insurance gives workers greater negotiating power relative to their employers. Instead of being plugged into a job, they would have the time and the bargaining power to choose a job that they would find fulfilling. Whether or not they succeeded is an empirical issue. We have to be engineers and get our hands dirty gathering data to know know for sure. We'll take a look at some of this research in a much later post.

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