The “Unemployment Is Voluntary” Myth

Loyd S. Pettegrew and Carol A. Vance of the Ludwig von Mises Institute ask and answer a question:

Why does a large portion of the population choose not to work when there are many jobs available? The answer is simple. If you can receive 2-3 times as much money from unemployment, disability, and/or welfare benefits (subsidized housing, food stamps, free cellphones, etc.) as you can from a temporary or part-time job, and live a life of leisure, why work? In 2011, the U.S. government spent over $800 billion on this “welfare,” exceeding expenditures on Social Security or Medicare.

So, is it true? Is the reason why unemployment is elevated that millions of Americans are choosing not to work because of cushy government welfare provisions?

After all, welfare payments as a percentage of GDP and unemployment have risen in tandem:

U6vswelfare

However, in this case it is clear that correlation is not causation. Why?

Well, if labour was truly slacking off then we would expect to see a shortage of labour. But instead we see an elevated level of applicants per job openings:

dr-7-people-in-pool-job-ope

This means that there are not enough job openings in the economy even for the number of current jobseekers, let alone the discouraged workers and disabled individuals who are claiming welfare. If the Federal government were to throw them all off welfare, the number of jobseekers per opening — already elevated — would soar. This means that the issue causing unemployment is not individuals dropping out of the labour force, but an economy that isn’t creating jobs very rapidly. So welfare is not acting as a disincentive to work, in this case. It is acting as supplementary income for those who cannot otherwise find an opening in the economy due to factors like job migration and automation reducing the level of labour desired by employers.

Under other conditions, it is possible that welfare payments could act as a disincentive to work. If there were a low number of applicants per opening, then welfare that paid better than the lowest-paid jobs available could be seen as a disincentive to work. But now, with job openings at a very low level? Don’t be ridiculous.

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41 thoughts on “The “Unemployment Is Voluntary” Myth

  1. Ugh, look at their bibliography, they did so little research. I think all the articles they publish have to be looked at by some of the staff (trained economists), so I’m genuinely surprised. I wrote a Mises Daily in 2010 on unemployment, and while I’m not particularly proud of it (e.g. I attack the aggregate demand approach, even though my alternative is an aggregate demand approach), at least I did better research: “Affording the Unemployed” . Re-reading it, I actually agree with large parts of it, even if I were to re-write it would look significantly different.

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  3. People are usually required to prove that they have applied for 3 jobs per week in order to continue receiving unemployment benefits. This renders the number of applications somewhat meaningless….I know firsthand of people that have been offered jobs, but turned them down, just to keep receiving the unemployment. When you have a job, you have to pay transportation expenses(gas) as well as other incidental expenses…not to mention the taxes. So for many people, taking a low paying job results in a net loss in monthly income when coming off of unemployment…thus they choose not to take the job offered to them…the one they were forced to apply for to keep collecting unemployment.

    • In Britain, unemployment benefits are such a tiny amount (equivalent to working at the minimum wage for around 8 hours) that it is very hard to earn less than it, especially given that low-paying jobs come with tax credits that generally result in a higher net income. That’s the way the system has been designed,to incentivise work. From what I understand in America the system is set up similarly, i.e. welfare recipients don’t lose all their welfare when they take a low-paying job, e.g. they can continue to claim food stamps

      • RUBBISH!!!
        Job seekers allowance is pennies, but housing benefit, and baby money arent.
        The welfare state is useless for the short term unemployed but its a gold mine for those who choose to live on it.
        We’re the only one car family on our street, we’re also the only ones who dont live in government housing….

        • Housing benefit and baby money (I assume you mean child benefits) aren’t unemployment-dependent. You can get a low-paying job and keep them.

        • Then cut welfare and give everyone willing to work a Job at a living wage in the form of a Federal Job Guarantee Program.
          Instead of paying people not to work we should pay them to work.

      • Australian Welfare rules allow “Work credits” i.e. you can get ad hoc jobs and still get welfare provided your income does not exceed the work credits threshold.

    • Agreed. Probably the only example of people acting rational in relation to an economic or government policy.

      When one simplifies their life and expectations, and meets their basic survival needs, working in an physically onerous job has low marginal reward for effort.

    • “When you have a job, you have to pay transportation expenses(gas) as well as other incidental expenses…not to mention the taxes”

      This is extremely critical in the debate. Thanks.

  4. Two points here, the first being that although people may be ignorant, they are not [generally speaking] stupid. If the upper echelon chooses to do those jobs that create no wealth what-so-ever [and get paid quite well, thank you very much], why should the lower castes do differently?

    Is receiving welfare any different depending on the mechanism? It is the wealth producing minority of workers out there who are supporting both ends.

    The second is that the “myth” you speak of, John, applies to all things knowable, it’s just in matters of economics and finance, the term is much too kind, as I believe we should add at least a sprinkle of avarice before folding-in the delusion.

  5. Very good, this one is very similar to the concepts I have been developing on my blog about why laissez faire hurts the poor. One of the conclusions I have reached is that at the end of the day the economically literate free-marketeers are well aware that one of laissez faire’s biggest drawbacks is its inequality and impact on the poor, however they try to minimize this by ultimately suggesting that poverty is either due to moral defects or that it is in fact a choice made by people. The subjective value of marginalism taken to an absurd extreme which views every action as a choice made out of aesthetics or something, lol, poor people choose to be unemployed and go on welfare because they like the hours, they choose to live in the ghetto because they get a good view of the river, etc. It’s all bullshit of course. But viewing poverty and unemployment as voluntary and merely extensions of subjective preferences is one of the major philosophical bedrocks used to justify free market fundamentalism. If you don’t share that underlying attitude then it becomes much harder to justify these policies.

    • The last hundred of years in the entire Western Civilization laissez faire is getting eradicated. You may have a president that talks a socialist, and another for free market – but overall government spending to GDP grows and grows.
      Right now the decision of what to do with wealth (spending money) is given in extreme proportion to the powers of the government, yet inequalities grow.

      • Should spending to GDP be considered the only gauge of laissez faire? Because the way I see it the concept of laissez faire is primarily oriented towards government involvement in private economic activities. While spending on things like the military has risen, the overall trend in the private markets has been deregulation and privatization of publicly owned entities. To deny that trend would be to ignore the last 30 years of policies around the globe.

        • Agreed. Victoria Australia had a very aggressive privatisation policy over the last 20 years. Research: Jeff Kennett Government.

  6. If only it were that simple. If there are insufficient jobs available, wouldn’t that be a reason to reduce immigration? And yet, Congress is in the process of increasing work visas, convinced that there is a shortage of labor, not of jobs.
    The reality is most likely neither. There is a shortage of qualified job applicants in many fields, as well as a shortage of people willing to work in low-paying fields. If some people are unwilling to accept “menial” work, their unemployment is voluntary – especially if they are unwilling to improve their skills and knowledge (a prerequisite for attaining what they would consider “meaningful” employment).

    • Well increasing immigration tends to increase demand for education, healthcare, infrastructure, housing, consumer goods etc, so that would tend to decrease unemployment…

      As for people being underqualified for positions, no positions are still being filled as you would expect when 7 people are on average applying for each one, at least one person will tend to be qualified for it! As for menial jobs, well they tend to pay better than being on unemployment, so hard to argue unemployment benefits are really a disincentive to people taking these unless they have non-monetary reasons, e.g. family, education, entrepreneurship, etc.

  7. Since all systems are designed by the few for their own benefit, it should come as no surprise to anybody that one of the problems with capitalism [if you wish to call it that] is unemployment, especially when the system breaks down to the degree we currently enjoy.

    If you actually eliminate the jobs of people who create zero wealth in this system, you would have a global unemployment rate of perhaps 75%. Most people are engaged in the tasks of legally stealing the labor-value earned from the 25% who do create wealth, thereby funneling it to the rest.

    • hahahha agreed. The biggest most securest and well paid for output is the State.

      The verbose policy documents they produce requires a Masters in English Literature, which excludes most applicants unless they attended “Grammar” i.e. private schools. It is a glorified work for the dole scheme for the rich.

  8. There could very well be people who are “unemployed” but aren’t actually really searching who could get hired if they returned to serious job search. Skill supply and demand aren’t homogenous. Aggregate openings and labor force numbers don’t reveal whether this is happening. It’s particularly plausible if we consider geography and search costs. Also, could it be possible that lower unemployment benefits would result in more entrepreneurship or something else, so that your assumption of job openings being exogenous does not hold? These are just possibilities. (see http://updatedpriors.blogspot.com/2013/06/is-voluntary-unemployment-myth.html)

  9. We have a 32 year old son who had an expensive private education at a top school. He did two years of accountancy and then bailed as he didn’t like it. He worked in an estate agency but didn’t like it. He then obtained a degree in electrical engineering, but didn’t like it and subsequently drifted through various minimum wage jobs, all of which he claimed made him depressed.. He is intelligent, physically strong, handsome and charming but also self- deprecating and work-shy. My observation is that many folk nowadays want a well paid job but don’t wish to work, especially at jobs ‘beneath their skill set’. Self employment opportunities abound everywhere for those who recognise opportunity, are prepared to work hard, and don’t have an entitlement attitude. Simon has lived with us for the last four years. there are signs he is beginning to get it, but I pity those without strong family support. Personally I think kids need to be introduced to work and develop a work ethic while they are quite young, but there is no doubt the modern economy is tougher than it was.

    • As many people as there are, are there that many different stories. We live in an era where people have become dependent of EVERY damn thing, on the one hand, immersed in an economy that has been financialised to death by the banks, taxed to death by the government, subjected to absurd global wage competition, not to mention all the other ridiculous things going on, on the other.

      I do agree with your assertion that kids need to be introduced to productive work at a young age, but this can only happen once we return to an economy that uses real money and has somewhat functioning markets [i.e., the elimination of cartels, etc.].

        • The common answer is gold or silver, but that, too, is an oversimplification.
          Real money would be a currency that maintains a constant value as measured against (perhaps) a basket of commodities. I’ve read enough of your posts to believe you see the value of that.

        • The correct answer, as per the subjective theory of value is that real money is whatever people want to use as money. Most of the time — whether we have “fiat currency” or a “gold standard” or seashells — this tends to be some form of credit.

        • Gold, and seashells (in that culture) have intrinsic value.
          They started as regular commodity suited for role of money and were gradually used more in more in exchange (eventually most of their value might be associated only with the exchange). They can’t be conjured from thin air. No one controls them, except for current owners.
          Credit is based on trust. It falls back on zero when it vanishes. This is why it may be fiduciary media, but it is not money.

        • How someone could seriously say that the fiat currencies currently in use aren’t “real money” for purposes of economics is completely beyond me. Its a store of value, unit of account and unit of exchange, its money. Any argument that it is not is primarily a metaphysical one which really has no applicable value for serious thinkers.

        • @ Piotr, how can you say that sea shell currency couldn’t be “conjured from thin air” as if fiat couldn’t. Making shell jewelry obviously takes time and labor, and cultural traditions is obviously what gives it applicability in any kind of trade. There are inputs which are put into it. Fiat money obviously involves the physical process of making base currency, but there is also the legitimacy and power of law behind it which makes it of any use. There is certainly input into fiat currency that goes beyond its mere decree, the government entity making it must have the power and recognition of the public for the currency to have any value to people. And that recognition comes from the government being able to carry out the duties of government, thus, just as shell jewelry has inputs of labor and cultural value which gives it intrinsic value, fiat money is backed by the expenses and labor outputs by government to have value. So to act as if there is no underlying value which backs up fiat is completely false, because it can only come from an entity which is undertaking the traditional roles of government which entails creation of value and labor inputs. Its just that its not a direct input so fools are tricked into believing it is worthless or somehow different from other forms of money.

    • I have experienced his lament. My personal opinion, speaking from experience is to set him up in a company, just get the paperwork rolling . then tell him to make money from a business. Anything just make sure he is passionate in it. His first year might be a zero tax return, but eventually he’ll find his niche.

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  11. Misallocation of productive forces, burden on business and high minimum wage all have effect on demand for labor. Personal corruption and deteriorating education have effects on quality of labor. Welfare has effect on supply of labor (I guess you wouldn’t debate this in entirety, but that it contributes little to the problem?).

    All in all, to expand a business or create one and employ a person in it – the benefits from additional unit of labor brought from it have to outweigh the costs (at least – minimum wage). If they don’t, there is just no way to get “more employment” regardless of aggregate demand.

    With massive regulation and extortion on the back of productive enterprises benefits of more work diminish. With high minimum wage they increase cost (oh and stop crying americans, poor babies, your minimum wage in terms of real wealth is very high in comparison to most of the world… while some EU countries beat this high bar does nothing to lower it). In this case any additional employment is just a raw deal. So the established companies don’t take it, and new businesses have high likelihood of failure.

    • I am self employed, and to be honest I don’t trust the skills of a potential employee, only because I have a high standard of work. It is a fine balance, do you employ someone and micro manage them, because they don’t have the skills, or do you give them trust and then assume all the risk when a mistake happens. If the government promised a wage supplement and insurance scheme I would be willing to train someone.

      If a migrant came to me and showed initiative, due to my nature I would take them under my wing. But they would have to be very committed. The old saying it is not what you know but who you know, especially in closed workplaces is very true.

      I think anybody with any skills who is unemployed for any length of time will set up there own business and try to have something meaningful to wake up to, even if that means poverty (Low sales, risk capital etc)

      I think there needs to be incentives for tradesmen (Plumbers, electricians, plasterers, painters, tiles, bricklayers etc) to take on an apprentice, and it is the duty of schools to teach the basic of tool operation and common sense. Not everybody can build an iPad or an app to go with it. Some people are suited to making things or feeding people.

      And in Australia (And I assume elsewhere), there is an entire army of bureaucrats and office buildings (Rent electricity computers etc) costing money to manage the welfare system. Give everybody a Debit Card with basic living income, and let them work for the luxuries in life. Some people will work a little bit for cigarettes and booze, others will work harder, study etc and aspire for a Porsche.

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  13. Aren’t you overlooking the fact that the US economy has undergone two bubbles in the last decade ? This means that the labor market has to go through massive restructuring and “retooling” of their competences. In that sense, don’t welfare payment encourage people to keep looking for work in the remains of bubbles ?

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