Wednesday, June 22, 2011

The Unemployment Problem

I re-read a NY Times article I came across sometime ago regarding Denmark Shrinking its Unemployment Benefits. Denmark lowered it's unemployment benefits period from four years down to two years after studies indicated that many people will wait until just before benefits run out before getting a job. The green line on the graph on the left shows that during the four year period from 2005 - 2007, some people got jobs within the first few months of being unemployed but then the percentage drops and stays flat for the next few years. Then just before and just after the fourth year, when benefits run out, there is a huge spike in the number of people finding jobs. The red line shows a similar pattern from a study back in 1998 when Denmark's unemployment benefits period was five years. This seems to confirm what anecdotally I have observed of the behavior of friends and acquaintances that were on unemployment. Some of them found jobs shortly after being laid off but the ones that didn't tended to only find jobs either just before their benefits expired or just afterwards.

I can think of a number of possible reasons why this pattern exists. First, many people on unemployment tend to procrastinate. Some of these people use the time as a long paid vacation. Some are mentally tired of trying to find a job and become discouraged. Others take a real hit to their self-esteem and spiral into a state of depressed non-action.

I suspect another reason is that people do not want to take jobs which they perceive is be below them. It might be a position which they feel is beneath them, a job which they foresee will be dissatisfying, or a wage which is lower than what they made in their prior job. The incentive, especially in the earlier part of the benefit period, would be to pass up these jobs, holding out for something better. Only when the benefits are about to expire do they accept the less than ideal jobs.

So how long should the unemployment benefits period be? How should the program be structured to get people back to work as quickly as possible? I really dont have any answers and only brought it up because I find it to be an interesting puzzle. What do you think?

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