Unemployment Benefits and Moral Hazard
In my Econ 211 classes recently, we discussed something that economists call “moral hazard.†If you look up “moral hazard†on the free internet encyclopedia, “Wikipedia†at http://en.wikipedia.org/wiki/Moral_hazard, you will find:
“In law and economics, moral hazard is the name given to the increased risk of problematical (immoral) behavior, and thus a negative outcome (“hazard”), because the person who caused the problem doesn’t suffer the full (or any) consequences, or may actually benefit. Such a concern typically arises in the context of a contract (for example, an insurance policy).â€
For instance, a person with fire insurance is more likely to commit arson on his own property than someone who does not have fire insurance. Also, a person with insurance against theft is less likely to guard against theft than someone who does not have insurance against theft. Similarly, those with medical insurance go to the doctor and for more trivial ailments than those who do not.
Well, what would we predict about unemployment insurance? Yep, you guessed it! According to a Governmental Accounting Office report, people who receive unemployment benefits stay away from work longer than those who do not receive such benefits. Essentially, they take longer to find an acceptable job than those who do not get unemployment benefits: those who face a lower cost of being unemployed, “buy†more time being unemployed. The highlights of the study can be found at http://www.gao.gov/highlights/d06341high.pdf while the full version of the testimony is found at http://www.gao.gov/new.items/d06484t.pdf (for the very ambitious, a full version of the report, go to: http://www.gao.gov/new.items/d06341.pdf).
In Europe, such as in France, the unemployment benefits are much more generous than here in the U.S. in both the length of time receiving benefits and the proportion of the benefits relative to former pay. For instance, benefits in France last anywhere from 7 months (for those who have worked or trained for 6 of the previous 22 months) to 42 months (for those 57 to 60 and have worked 27 months within the last 3 years). Unemployment benefits in France range from 75% of one’s previous monthly income for those who had low wages to about 57% for those who were high earners. Of course, the minimum wage in France is over $9 an hour (Euros converted to US Dollars) and that contributes to unemployment as well. What do you think the unemployment rate is like in France relative to that in the U.S.? Take a look at the French unemployment rate at URL: http://www.indexmundi.com/g/g.aspx?c=fr&v=74 and
the historical series of U.S. unemployment rates at the Bureau of Labor Statistics (who, by the way, recently started recruiting here at Nicholls).
When you get to Economics 212, you might want to keep the relationship between unemployment benefit generosity and the unemployment rate in mind.
Morris Coats
March 22nd, 2006 at 10:17 am
All I could say about moral hazards are that people respond to incentives. Like the article said, “a person with fire insurance is more likely to commit arson on his own property than someone who does not have fire insurance”. The unemployment rates are just normal if you think about it. Technology is the reason for that. This relates to the Industrial Revolutions of 1848 of our Western Civiliation. Many people are drawn out of work because of inventions and such. But as much money we, our nation, is using to create such technology, we, our nation, should be able to provide much more money to the unemployed who has been driven away from their job because of revolutionary times.
March 23rd, 2006 at 8:05 am
I feel that unemployment benefits are a great tool for one to utilize in times of need when unemployed. The problem I have though is when people selectively choose not to work and then rely on this benefit.
After reviewing the unemployment rates for 2004 between France and the U.S., it proves that people are less likely to find employment when receiving a ‘fat handout’ over an extended time. The unemployment rates in 2004 for France and the U.S. came in at: 10.1% and 5.5%, respectively.
We as a society have created this problem and surely can remedy this issue by capping the time frame in which one can collect benefits. People do need help at various times of their adult working careers, and that is the intent of the welfare/unemployment system. Lets not encourage people to stay out of work because it pays, afterall, if the milk is free why bother buying the cow!
March 26th, 2006 at 7:35 pm
Statistics, like pictures, speak volumes louder than words. There is no question that increasing unemployment benefits will nurture increasing unemployment rates, a man-made moral hazard. As vividly noted by the Bureau of Labor Statistics, from 1999 through 2003, U.S. unemployment rates for age 16 years and older ranged from approximately 4% to 6% nationwide. During that same period, France’s unemployment figures were in the ballpark of 9.7% to 11%. Are these stats a mere coincidence, noting that European countries are considerably more generous in unemployment length of time and pay proportions than the U.S.? Certainly unemployment insurance is a necessity, especially in our volatile workforce. My mom, an NSU grad, was employed by a healthcare company where she received outstanding raises and performance ratings for seven years. Yet, due to the economy and downsizing, she was terminated and re-employed three times before she decided to refuse re-employment and seek a more “secure†job. In the interim she did, of course, draw unemployment benefits for some months until she was hired by her present employer of 12 years. Realistically, there are certainly hard-working high school and college grads that are having a rough time securing gainful, good paying, long-term career positions. However, for those looking for a free ride, European unemployment services certainly are accommodating. Why pay for a first-class ticket when you can ride coach for free? I certainly hope that the French take a look at the “American wayâ€, at least when it comes to hard core facts relating to unemployment benefits and unemployment rates.