Unemployment: Who or What is to Blame?


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Expert Perspective from Grahall’s OmniMedia Editorial Board

At the risk of going “off the ranch” and getting into topics that are fraught with politics, our Editorial Board reviewed and discussed Robert Barro’s August 30, 2010 article for the Wall Street Journal (The Folly of Subsidizing Unemployment).

Mr. Barro had much blame to pass around for the continuing high unemployment in the US, landing most squarely on “the expansion of unemployment-insurance eligibility to as much as 99 weeks from the standard 26 weeks.” 

This may be an argument that only history will be able to resolve.   But from a “compensation” perspective, unemployment checks are a form of incentive pay.  As Grahall’s Bill Byrnes says: “All incentive programs ‘work’, some of them with unintended consequences”. 

But are weekly unemployment checks really “[a] program that reduce[s] incentives for people to search for and accept jobs…”?  If the answer to that question is “yes”, as Mr. Barro contends, then the disincentive happens at week one as easily as it does at week 26, 39 or 99.   He doesn’t however propose eliminating unemployment checks altogether.  In fact he supports the decision during a recession  “…to adopt a more generous unemployment-insurance program”.  Gosh, we wish he would make up his mind!

Mr. Barro does claim some justification in railing against long-term unemployment by calling out European countries where he suggests that the impact of extended unemployment assistance has in effect increased unemployment.  Well, let’s take a closer look. 

Some European countries or maybe even many in the EU 27 have more generous unemployment assistance than the US, but as of August 31, 2010 the EU 27 unemployment number stood at 10%.  That is, of course, an average and averages can be deceiving. There are outliers on both sides of that average, with Latvia and Estonia weighing in at 20% unemployment while the Netherlands, Demark and the UK are well below 10% (assuming I have properly interpreted the graph Unemployment Rates in Member States).

I guess we should be glad we aren’t Latvia where the “Unemployment benefits have a maximum entitlement of 9 months“.  Or maybe we should wish we were the Netherlands where unemployment assistance can last anywhere from 6 months to 3 years depending on employment history.

We offer this discussion only to say that it is easy to lay blame but harder to make a case for or against something like extended unemployment assistance when all the data and examples we have in the US date back to times when the economic situation was much, much different.  And the overseas examples might not be as clear cut as one would like. 

This situation is not black and white.  It is a very dense gray area that is fraught with politics, deficit spending, state’s rights, human emotion, globalization, ‘off-shoring’  jobs, education, and just about every other thing one can think of.

Sure if unemployment were lower we would all be happier, especially the Democrats seeking re-election in the fall and those currently unemployed and struggling on near poverty level unemployment assistance to make ends meet.  (The average unemployment check is $300 per week or $15,600 per year, which is less than the poverty threshold for a family of 3).

Of course, government checks are only part of the picture when it comes to unemployment. Most organizations have severance policies that are tied to the length of service and position.  And it is not unusual for severance benefits to be provided at all or most levels of the organization.

Grahall’s Michael Graham says:  “In our experience, ‘lump sum’ severance payments are more expensive and less effective than severance paid over time.  Terminated individuals who receive lump sum severance payments spend significantly more time ‘soul searching’ before they start job hunting.”

Graham goes on to add that some years ago, Grahall developed an “incentive severance” plan that took a difference spin in this approach. The plan paid severance for a longer than average time, and didn’t entirely penalize severance receivers when they obtained a new job.   For example, let’s say the severance paid weekly was $X (for a period of time based on service that might have been half again as much as a comparable plan).  When the individual receiving s severance obtained a job, that individual would receive a bonus amounting to 50% of the unused severance.  And guess what? This incentive severance program proved to be less expensive than the “standard” severance plan. 

With incentive severance, the terminated employee has an incentive to find work before his severance expires and company’s overall severance cost can be substantially reduced.  There may be a lesson here for our legislators as they think and rethink unemployment support. 

Graham offers a parting point: “When I used to drive by the ‘Town Farm’ in Cavendish Vermont, my father used to always say that when he was young, when people couldn’t find work there was always work at the town farm. Apparently, the farm provided work for anyone that needed a job. A few weeks of “cleaning out” cow stalls and throwing 80 pound hay bales made a lot of jobs seem more acceptable. In the end though, it provided income to families and individuals that were between jobs. Yes, it was a simpler time. I’m just not sure if people have changed much.”

We will let history decide whether the consequences of extending unemployment were positive or negative. Whether the decision is “good” or “bad” we can each decide on our own.   

Contact Grahall’s OmniMedia Editorial Board at edie.kingston@grahall.com

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