It is no secret that tens of millions of Americans have lost their jobs when the government shut down their businesses – restaurants, bars, etc. Of course, some of those job losses would have occurred even without government interference – people do not want to rub elbows during the pandemic. However, it is fair to say that massive government intervention did contribute to additional losses of income to millions.
It is also no secret that showering the voters with money in an election year is a tactic employed by politicians all around the world. Some of the emergency $600 weekly payments in unemployment benefits make sense in the context of a lockdown, perhaps as a tacit way for the government to say “sorry we closed your bar.” However, the recently proposed extension of these $600 payments until January 31, 2021 would bring very bad unintended consequences.
Economists and even politicians have criticized this proposal. Some correctly point out that with an additional $600 per week of emergency unemployment benefits, for nearly half of the population, not working would bring home more money than actually working, would therefore be a reasonable financial decision. The implications of this would be huge. You think elections right now resemble the auction of promising more free stuff? Fast forward to 2021, when people would have spent nearly a year not working and receiving more money.
Perhaps the COVID pandemic was a new development that we have not seen in modern times. However, people choosing not to work because not working pays more than working is a widely known and studied phenomenon. It is called the “unemployment trap” and anyone doing economics for a living knows about it.
The double-digit unemployment rates incurred during the lockdowns in the U.S. persist in some European countries, COVID or no COVID. For example, Spain’s unemployment rate was 17% in 2009, 26% in 2013, and 14% in 2019. Italy’s unemployment rate has been hovering around 10% for almost a decade now. For the past 20 years, the American unemployment rate was roughly half of the EU’s.
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Also note, that official unemployment numbers in Europe usually appear lower than actual unemployment because of some quirks in measurement, or various re-training and education schemes which classified those who do not work as “in education” and therefore not unemployed, when in fact they are unemployed.
The unemployment trap is much more significant and persistent in Europe than in the U.S.
All this supports the common sense logic that, if it pays to not to seek employment, some people will consciously choose unemployment. Of course, there are many factors at play and the unemployment trap is not the only factor here. However, it is fascinating to observe the laws of economics working in countries as different as Spain, Italy, and the U.S.
Short term unemployment, even if caused by extraordinary events can lead to long-term unemployment, loss of skills, and even less opportunity to return to work (or at least well-paid work). It is quicksand, wet cement, bog – pick any metaphor – easy to get in, but hard to get out. Loss of skills, loss of qualifications, not keeping up with the latest trends in your field of expertise – these are objective reasons why short-term unemployment can become chronic.
There also are subjective reasons for people choosing not to work. It is more complicated than mere “laziness,” “lack of character,” etc. At the same time, creating situations where it is financially more advantageous not to work does reward these features.
Moreover, it also discourages those who are industrious and do want to earn their living themselves. Going to work every day, not seeing your kids, and collecting exactly the same paycheck as your neighbor next door who spends his days on his couch is devastating to morale and fans dissent or outright hatred.
An economic policy of many right and even left-oriented governments has been to avoid long-term unemployment. While it is difficult and not all governments have been successful, encouraging unemployment is a devastating policy with devastating results. Helping people to get back to work as soon as possible is superior to encouraging them to stay at home.
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