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The Unemployment Illusion

Robert Nielson asks if generous welfare benefits lead to high unemployment

 

Every debate about unemployment inevitably ends with someone claiming the problem is people are too lazy to work. Or that there is more money on the dole than in a job. This belief isn’t solely held by taxi drivers but by wide sectors of society. So last year I decided to look at the facts. I decided to ignore the anecdotes and urban myths and listen to people who have studied the issue.

What I found was that there was little or no evidence to support the idea that generous welfare benefits were the cause of high unemployment.

The reason for this is that a job is not simply a way to make money; it is also part of an individual’s identity. People are defined by their occupation. The first thing you ask someone when you meet them is what job they have. To which most respond, cialis sale “I am a teacher, buy a builder” etc. A job isn’t just a means to an end; it is a major part of our life. Surveys reveal that many people would work even if they didn’t need the money. All people have a psychological drive to produce something, salve to create, to pay their way.

Unemployment causes severe damage not just financially, but also psychologically. It is socially unacceptable not to work, so the unemployed therefore suffer a loss of respect. Status and respect are as important as money in life. Unemployed workers suffer psychological damage from their lack of a job, such as loss of self-esteem, self-respect and a feeling of hopelessness. They suffer from a higher rate of mental illness than those working, including depression and suicide. In many ways we are defined by our work; this means the unemployed may feel their life lacks meaning, which can lead to despair and hopelessness.

There is no evidence that they suffer from a lack of work ethic. Studies find that the unemployed are often more enthusiastic about work than those who actually have jobs. While people with children are entitled to the greatest amount of welfare benefits, they are also the most motivated to get a job. A study found that the psychological damage caused by unemployment among men would cost €33,500 euro to bring their level of life satisfaction to the same level as employed men. For women the figure is €68,500.

The traditional economic theory ignores inconvenient facts such as the fact that many unemployed workers are not eligible for unemployment benefits or the full range of allowances. One study showed that only 30% of those classed as unemployed were receiving benefits in America. The figure was 26% for the UK. There are many restrictions on receiving allowances. For example if you quit your job voluntarily or are fired you may not qualify. Likewise if you refuse job offers you can be disqualified.

Many allowances which get mentioned in the news apply only to families, whereas 80% of the unemployed are childless. These findings apply both in Ireland and abroad. Only 11% of the unemployed in Ireland receive rent allowance, despite the anecdotes of people “too lazy to work” getting free houses.

In fact, a study found that 97% of those unemployed in Ireland in 2011 would improve their financial situation by getting a job. Only 3% of the unemployed are earning more on the dole than if they had a job. This simple fact alone should put all the myths and stereotypes to rest. This should silence all who claim the unemployed are living a life of luxury or lack an incentive to work. Unfortunately it takes more than facts and figures to defeat a myth. If it was that easy we would hear no more of the Loch Ness monster and Republicans in America would never win elections.

The average unemployed person receives half of their previous wage. This makes it extremely hard to claim there is no incentive to get a job when such a person could double their income by getting a job. The simple fact is that there aren’t jobs out there. It isn’t from lack of effort that the unemployed can’t find jobs, it’s because they can’t be found.

In most countries it is necessary to have worked a certain length of time before it is possible to receive benefits, this would actually cause benefits to have a positive rather than negative impact on participation in the labour force (this point was admitted by Milton Friedman of all people). This would mean that you must have worked a certain amount of time in order to receive unemployment benefits. So despite the number of people who claim it’s so, it’s not possible to get a handout without having worked a day in your life.

Similarly, the duration for which people can claim unemployment benefits has a negligible effect on unemployment levels. Threatening to cut someone’s benefits off completely doesn’t help them get a job; the problem is there aren’t any to be found.  Nor does the level of benefits compared to wages, average, industrial or minimum. You’re probably noting a pattern here. No matter which way you try to measure it, there simply isn’t a link between benefits and unemployment. How lax or generous the rules are for qualifying for benefits also makes no difference. No matter which way you look at it, welfare benefits do not cause unemployment.

An examination of other countries further proves the point. The countries with the most generous welfare systems in the world are Sweden, Denmark, Norway and the Netherlands. The countries with the lowest unemployment rates in Europe are . . . Sweden, Denmark, Norway and the Netherlands. Likewise the countries with the lowest levels of benefits are Spain, Italy, Portugal and Greece, none of which can be described as doing particularly well.

After drawing together different studies, viewpoints and opinions it is clear that the disincentive effect that is supposed to affect the unemployed is greatly exaggerated. The conventional wisdom is simply not supported by facts. In fact most available data contradicts it. The orthodox model fails to give an accurate description of the real world, instead relying on overly simplistic assumptions. It ignores features of welfare systems that prevent people from receiving assistance, such as means tests and work tests. It ignores the stigma associated with receiving hand-outs and the psychological damage unemployment does. It glosses over the non-financial benefits people gain from work. Contrary to the orthodox opinion, generous welfare benefits do not lead to higher unemployment, longer durations of unemployment or a disincentive to work.

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