State of the Union: Economic Band-Aids for Poverty and Unemployment

by Ryan Young on January 28, 2014

in Deregulate to Stimulate, Economy, Employment, Features, Regulation

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One of progressivism’s most admirable traits is its concern for the little guy. But many progressive policies for alleviating poverty, unemployment, and other social problems don’t work as advertised. This is because those policies often focus only on the desired outcome, and ignore the deeper processes that ultimately generate those outcomes. This misplaced focus was on full display in President Obama’s State of the Union speech.

This is a subtle point that would benefit from an analogy. Suppose, while slicing vegetables, that you accidentally cut your finger. The sensible thing to do is put on a band-aid. But in the long run, you are far better off knowing and practicing proper knife safety. The band-aid eases the immediate problem. But if you focus on the long-term process of safety, you are far less likely to get hurt in the first place.

Now apply this thinking to the President’s call for passing the $10.10 federal minimum wage bill currently winding its way through Congress. A lot of people aren’t making very much money. The obvious thing to do is legislate a raise for them. Pass it! Some people will clearly benefit; no doubt many of them will appear at press conferences if the increase is enacted. But there is a tradeoff. Those raises are offset by reduced hours and even firings for other people.

There is also an unseen cost to the minimum wage: workers who are never hired in the first place. These minimum wage casualties cannot be trotted out in front of cameras because we don’t know who they are. But we do know that they exist. They are mostly young, and they are disproportionately minorities. These workers lack experience and skills because they haven’t lived long enough to gain them yet. It may not be worth it to pay an employee at that skill and experience level $10.10 per hour.

Pricing people out of employment prevents them from getting the experience they need to get higher-paying jobs later in life. It makes the old paradox even more painful: without experience, you can’t get the job, but without the job, you can’t get experience.

The chase after an end result—higher wages for low-skilled workers—ignores the larger social processes at work in the economy. In the long run, wages are tied to productivity. The more a worker produces, the more his services are worth to his employer. Instead of mandating higher wages, a process-oriented reformer emphasizes policies that allow workers to be more productive.

A deregulatory stimulus along the lines of what Wayne Crews and I have been proposing for some time would do nicely; workers would spend less time complying with rules and more time being productive, and thus better paid. It would also remove obstacles to innovation and technological advance that are the long-run drivers of increasing productivity and wealth creation. When that process is blocked, wages stagnate.

Unfortunately, the topic of regulation did not come up even once during the entire speech. Hopefully this does not reflect the administration’s priorities.

The same outcome-over-process oversight is in the President’s proposal to extend–restore, in his words–unemployment benefits. If someone loses their job, the obvious thing to do is to give them a helping hand while they look for a new job. But again, unemployment insurance has tradeoffs that at least offset the advantages.

People respond to incentives. And unemployment benefits reduce one’s incentive to look for a job. They allow some people to wallow in discouragement longer than they otherwise would. Other people decide that receiving benefits can let them wait until a higher-paying job opens up, instead of having to take an available, if unappealing job right away. The result is unnaturally high unemployment. This is not the policy’s intention, but it is very much its result.

More effective policies would make the hiring process easier. Reducing compliance burdens would reduce the regulatory friction scraping against otherwise-promising new hires.

As companies grow, more and more rules affect them. When a company reaches 4 employees, it becomes subject to the Immigration Reform Act and its associated paperwork. At 15 employees, the Americans with Disabilities Act comes into play, and the Family and Medical Leave Act announces its presence at 50 employees. There are many others.

Many companies stop hiring when they come up against these thresholds, because they can’t afford them. Reducing these burdens would do far more to ease the sting of unemployment than extending unemployment benefits.

As in past years, the President used Tuesday’s State of the Union speech to describe the equivalent of band-aids for injury-prone cooks. But he seems unaware that the long-run process of practicing of kitchen safety is what it takes to ultimately reduce the amount of culinary casualties. As in the kitchen, so in the economy.

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