Unemployment insurance: a new study confirms the obvious
The journal of applied psychology recently published an interesting study. This study estimates effects of unemployment insurance generosity on job search. The following quote summarizes the results of this study.
“Perceived UI generosity was associated with slower reemployment speed, via reduced time pressure, job search priority, and job search metacognition. Perceived UI generosity was related to higher mental health, via reduced time pressure and financial strain. Finally, perceived UI generosity was related to increased reemployment quality, both directly as well as indirectly through lower time pressure and financial strain, and subsequent higher mental health… job seekers looking for work under three different unemployment insurance systems in three different countries (United States, Germany, and the Netherlands) provides insight into the mechanisms explaining UI generosity’s negative (lower reemployment speed) and positive (better health and reemployment quality) outcomes.”
This study does provide pertinent data on the costs of and benefits to a type of social insurance. Should we expect an efficient balance between costs and benefits of social insurance? All forms of insurance create moral hazard, encouraging riskier and costlier behavior. In the case of unemployment insurance moral hazard means extended job searches. Longer job searches translate into less work done; less real wealth produced overall. There are also real benefits of insurance to recipients, financial and psychological. However, it is important to realize that stress motivates people to take corrective actions in the economy. We desire and benefit from security, but security can slow progress in correcting economic problems.
The summary of this paper also does not mention costs to taxpayers of funding longer job searches. Social insurance both subsidizes unemployment and taxes employment. We should also note that paid benefits of unemployment insurance are concentrated on a small part of the population, the costs of funding this insurance are widely dispersed among all taxpayers.
Are the full costs of social insurance justified by the total benefits of greater security? The unseen nature of undone work and dispersed nature of tax costs suggest overly generous social insurance. The question as to whether social insurance is overly generous requires additional economic analysis. More specifically, we must apply a type of economic analysis known as the logic of collective action. What does this mean? We must consider costs of lobbying for both higher benefits and lower costs in any social insurance system.
People who are at greatest risk of being unemployed or actually unemployed organize and act to lobby for social insurance more easily, because they are fewer in number. Taxpayers have an incentive to limit social insurance generosity, but it is more costly for a larger group to organize an act in their interests. The fact that larger groups divide tax costs fewer ways, relative to insurance recipients, indicates less motivation for cost control. In other words, larger groups are inherently harder to organize, and necessarily less motivated on an individual basis.
The logic of collective action suggests bias towards overly generous social insurance. Moral hazard problems with insurance costs are obvious, a matter of common sense. The logic of collective action is not quite so obvious, but necessary for understanding problems with social insurance costs.