Sunday, March 21, 2010

Employment and Unemployment Insurance

States will have to raise their unemployment insurance rates to pay back the money they borrowed from the Federal Government. Unemployment insurance may rise from $100 to $237 per worker in some states. And some neo-classical economists claim that this will take money from the companies, reducing their incentive to hire and possibly causing further layoffs.

At which point I can only laugh at the stupidity of people who've never run a business. I am amused by the notion that businesses will lay off workers because the price of unemployment insurance rose from $100 per worker to $237 per worker. This presumes that employment is worker-price-bound. It is on a micro level but not on a macro level. On a macro level it's demand-bound. Businesses are not charities. They have the least number of workers necessary to meet demand, that's how they maximize their profits, which is the whole point of the matter, remember? If insurance rates rise they'll shrug and raise their prices to match. Which could, of course, reduce demand if a single business did this and thus had higher prices overall than their competitors (and thus my micro statement) -- but if *everybody* is having to raise their prices at the same time (i.e. it's a macro-level event), then instead what we get is price inflation across the board, which has little effect upon aggregate demand, something we learned from the stagflation of the 1970's to the dismay of Keynesians who predicted that inflation would cause increased demand.

In short, the only thing that will cause businesses to lay off workers is if the demand for their products goes down so they don't need as many workers (or if they improve their efficiency so they don't need as many workers, something which has been happening for decades now). There is a marginal case where the cost of a worker is currently lower than the cost of an efficiency improvement but a slightly higher tax will make the cost of the efficiency improvement less than the cost of a worker, but $137 doesn't buy a whole lot of efficiency improvement. So I don't expect the hike in the unemployment tax to affect employment in any significant way, its primary effect will be price inflation. Given current deflationary pressures in our economy and the perils of falling into the debt-deflation liquidity trap, it's hard to be too upset about that.

- Badtux the Economics Penguin


  1. Now that I am enjoying the largesse my former employer was setting aside for me, I will do my best to maintain business demand. Sadly, half the time the wherewithal is mostly a matter of where did it go?

  2. John Kyl's answer is to stop paying unemployment compensation, so that the unemployed will get off the great vacation gravy train and get back to work.

    In other breaking news, States and municipalities are getting into deeper and deeper financial holes with every passing day.

    Obviously, the answers are to bust up them budget-breaking unions and stop paying those rich pensions to freeloading retirees.

    Other than that, were still basically fucked.

    But now, at least, we'll have some sort of health care.

    Let's hear it for the 216!


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