Our unemployment insurance system sends the wrong signals.

I have heard liberals argue recently in favor of growing and extending our unemployment insurance programs. But I have real problems with how unemployment insurance as it is currently structured and financed today.

Let’s consider an example of Bill, an employer who is considering hiring Joe. If there were no employee taxes, no unemployment insurance, no benefits and no other employer costs, it would be simple to calculate the cost at say $10 an hour. And as long as Joe can generate at least $11 in increased revenue for Bill then Bill is ahead as an employer by $1 an hour. But it is not that simple. Bill must also pay perhaps $.50 an hour for unemployment insurance, $.75 an hour for social security and Medicare employer contributions, $1 an hour for workers compensation insurance and $2 an hour in health care benefits. All of a sudden Joe’s cost to Bill is $14.25 an hour (not to mention increased liability insurance, capital costs, management time and other overhead costs). So if Joe can still only produce $11 in marginal income, Bill lays Joe off. And then you know what happens? Bill’s cost for unemployment insurance goes up even higher (say to $.75 an hour) because Bill has a history of laying employees off so he is deemed to have increased the cost of providing this insurance.

This last characteristic about employer’s cost of unemployment insurance is another disincentive to hire anyone in the first place. Why hire anyone on the margin? If Bill guesses wrong, he not only loses on his underlying bet but his future cost of business will increase along with his higher unemployment insurance premiums. Our incentives should encourage, long-term employment, mid-term employment and short-term employment. At least when Joe is working in what might be a short-term job, he is learning, producing and positioning himself far better to land his next gig than sitting at home collecting unemployment insurance.

I am fine with charging an employer for workers compensation insurance. Because that is a real cost attributable to more work and is roughly priced according to how dangerous the work is. It reflects approximately the marginal cost of each additional hour of work. All things being equal, we would rather encourage safer work than less safe work. This charge to Bill reflects real costs associated with the industry in which Bill operates, and does not subsidize dangerous jobs by making safer jobs less competitive.

But it is counterproductive to charge employers for the cost of unemployment insurance. It makes marginally profitable employees and prospective employees less profitable and sometimes not profitable at all. When the later happens people lose their jobs and go onto unemployment insurance, raising unemployment insurance premiums and increasing the subsidies from government.

I am all for a limited safety net provided by government. But government ends up subsidizing unemployment insurance benefits and recently has extended them to up to three years.

We should be simplifying our safety net. If you don’t have enough money for food, basic housing and medical care I support helping these folks. But the system would be far more productive if we streamlined it and separated it from the issue of whether the individual just lost his job.

I have liberal friends that argue that unemployment benefits are a great way to pour money into the economy. And it might do some of that. But this trick might have had more positive benefits when most of what these unemployed people consume goods that were manufactured in the US. That is rarely the case today. The government is subsidizing unemployment benefits today and creating jobs, but most of them are in China.