Wednesday, March 10, 2010

People respond to incentives – the supply side edition


This amazing graph (click to enlarge) shows the percentage of unemployed people who returned to work in Pittsburgh in the period 1980-85.  The horizontal axis on the graph represent weeks relative to the time when unemployment benefit payments to the individual cease (week 0).

Negative numbers indicate the number of weeks of unemployment benefit remaining for the individual.  Positive numbers tell how many weeks it is since the individual stopped receiving unemployment benefits.

In the weeks just before the payments stopped about 2% of those unemployed returned to work.  On the week the payments stopped this shot up to over 25% and quickly went back down.

The evidence is clear. People respond to incentives.  Why work when your income can be replaced with welfare payments?  As soon as the payments expire some 25% of people find a job.  More here.

This is not evidence to support the abolition of unemployment benefits. Instead is argues that the payments should possible be staggered downward to try and smooth out a pattern like that seen in the above graph.

[In an interesting aside I was recently asked to consider what would be an appropriate comparison to make when evaluating the level of unemployment benefit.  One suggestion could be that we should treat our unemployed no worse than we treat our prisoners.  After all, to do otherwise would suggest that crime pays.  How much do we spend on a prisoner in Ireland each year? Answer: €97,700!]

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