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Home Publications Blogs Beat the Press Casey Mulligan is Right Again

Casey Mulligan is Right Again

Wednesday, 17 July 2013 07:10

I guess I'm about to join the Casey Mulligan fan club. Okay, not quite, but he was good enough to make a point that went against his general political view a couple of weeks ago, so I will take a moment to acknowledge a point that goes somewhat against how I generally see the world.

In his column today, Mulligan argues that policies like extending health care subsidies to people through health care exchanges and unemployment insurance must have some negative effect on employment at the margin. Mulligan acknowledges that many people may choose to work because they feel that is a way to contribute to and be a part of society, but still at the margin there must be some people who will opt not to work if we make that option more attractive, as these policies do.

Mulligan is 100 percent right on this point. The question is both the numbers involved and how we view the individuals who make the choice not to work. 

I certainly would not dispute that both policies give people more incentive not to work. I am inclined to think that the impact is small both from personal experience and also based on evidence -- including some that Mulligan himself has cited.

In terms of personal experience, I am continually impressed by the commitment that many low-paid workers have to working, as opposed to trying to get by on government benefits. As a relatively well-paid professional, I will certainly acknowledge that I don't have that many personal encounters with people at the lower ends of the income spectrum, but when I have, I rarely find people looking to make a life on food stamps and disability.

More importantly, the evidence shows that people often work in situations where they gain very little over not working. Mulligan himself has written about how the marginal effective tax rate from losing benefits like food stamps and the earned income tax credit can be over 70 percent for relatively moderate income workers. Yet tens of millions of people still opt to work in situations where they would have almost as much money if they chose not to work.

The other key issue is how we view the people who make the decision not to work as a result of government benefits. We know that the availability of unemployment insurance will make unemployed workers more reluctant to take jobs that they consider bad. I see this as largely a positive for workers and society. If a worker has spent years developing skills as an engineer or medical technician, it is desirable that they have the opportunity to use these skills. If unemployment insurance allows them to spend an extra 2-3 months looking for work so that they can find a job that uses these skills, then I consider it a positive outcome from the program.

Similarly, if access to affordable insurance allows older workers in bad health to retire a few years earlier than would otherwise be the case, I also consider this a positive. We have Medicare at age 65 because we know that the private health care market did not provide affordable health care insurance to older people. Workers in poor health may face this situation before age 65. If the exchanges give them the option to get affordable care without working, that's a good thing in my book.

In any case, we want to know the numbers involved. Most research suggests that they are relatively small. (Okay, we can fight over that adjective.) In the case of unemployment insurance, the main effect seems to be that it keeps people looking for work rather than dropping out of the labor market altogether. (Research shows that when their benefits expire, most workers just drop out of the labor force, they don't find jobs.)

We'll see the impact of the subsidies in the health care exchanges soon enough, but Mulligan is absolutely right that it will not be zero. The question is how many people will stop working and also how we feel about people making this decision.

One other point worth noting. In a context where we still have considerable unemployment, the decision of an older worker to drop out of the labor market is likely to open up a job for a younger worker. That is also a good thing in my book.

Comments (11)Add Comment
written by foosion, July 17, 2013 9:33
It's not just aid to the poor the reduces the incentive to work.

Consider someone with a large portfolio. Current economic policy is helping corporate America at the expense of most workers. The portfolio is more valuable, the fruits of labor less so. This provides an incentive to stop working and live off the portfolio.
nice honesty
written by JT, July 17, 2013 9:44
Your civility is appreciated. This is where the level of debate should be.
Universal Healthcare eliminates the issue
written by Robert Salzberg, July 17, 2013 10:16
If everyone got healthcare regardless of work status then there would be no incentive to not work to get healthcare. If Cuba can afford it, why can't the U.S.?

Taking this thought a step further, if everyone got healthcare we'd get an increase both in the health and productivity of America which in turn would create even more jobs.
written by AndyfromTucson, July 17, 2013 11:25
" . . . but still at the margin there must be some people who will opt not to work if we make that option more attractive, as these policies do."

Sure, if policy makes it easier to survive without working some people will choose to stop working. However, that doesn't mean the job they performed will automatically go away. If their employer still faces the same demand for their product, then the employer is going to have to hire someone to replace the labor force dropout. All other things being equal, The net effect would be that the total number of jobs stays the same, but the unemployment rate drops (since one person dropped out of the labor force). If enough people drop out of the labor force, there might be some upward pressure on wages as employers compete to find replacements for dropouts.
written by Bloix, July 17, 2013 11:53
I think you're being much too kind to Mulligan.

As a matter of logic, it's probable that the provision of subsidies will lead some non-working people to choose to refrain from looking for work, or from taking unsuitable jobs, for at least some period of time. A stay-at-home mom whose laid-off husband is looking for work might take a part-time job at McDonald's when the benefits run out.

But in doing so she occupies a spot that would have gone to a 17-year-old just entering the labor market, who now can't find a job.

As long as the economy is not at full employment, when one person is able to refuse to take a job due to government benefits, another person will step up and take that job.

And if benefits are cut or expire, forcing a person to take a job s/he would otherwise refuse, some other person who wants to work will lose the chance at that job.

So the net effect on employment will be zero.

It's possible that Mulligan is arguing that the decision of some people not to work reduces the pool of unemployed labor, which pushes up wages, which reduces the demand for workers, which reduces total employment. That's a long chain of causation that might be true, but boy, you'd want some empirical evidence, wouldn't you? I would think that given the meager range of benefits available to American unemployed workers, plus the current high unemployment rate, this effect would be either trivial or non-existent.
written by watermelonpunch, July 17, 2013 10:14
To be quite frank, I'm not sure where any of this leads us, even if there was any fix on the numbers.

But I had to comment that I think there would be a great benefit to all these debates if more reasonably well paid professionals, and even moderately paid workers, had more productive & communicative encounters with people at the lower ends of the income spectrum.

Seems most of the time most people only get a clue about what's happening in another economic class if they happen to slide into it themselves.

And wth... why are we not applauding those clever individuals who know their math and decide to do exactly what incentives encourage them to do? We applaud businesses which do that, after all.
there are quite a few...
written by pete, July 17, 2013 11:57
Many friends who work with these "marginal" folks tell of the quite rational decisions to remain unemployed. The many costs include child care, transportation, and of course loss of benefits. Unstated, of course, is the tremendous loss of leisure time, an important factor in labor economics models. All told, for these "marginal" folks it can take quite a jump to go from unemployed to employed.

Note, here I am in Bangkok...I casually stated to a colleague, there are no unemployed in Thailand. This seems to be true. Everybody does something. A big percentage of this is cultural/religious, why Marx hated it I guess. Essentially, one does what one does due to past life mistakes, and does not complain. Hopefully this improves future lives circumstances.
The deserving and the undeserving
written by Jennifer, July 18, 2013 12:38
@watermelon punch
My thoughts exactly-it would be a good idea if there were more interactions between well-paid professionals and lower-income workers-for one thing the former would realize how much work it takes to survive on the margins. But more importantly to your second point-business is expected to maximize every incentive for profit. This may mean sitting on money because the investment opportunities are not just right. But when individuals do the same-choosing not to work because they do not make enough when looking at the cost-benefit analysis (perhaps because of care commitments, transportation etc) they are "lazy".
written by urban legend, July 18, 2013 2:34
There is a crystal clear historical refutation to Mulligan's whole line of thought: low unemployment rates when jobs are numerous. The same safety net policies are there, but when jobs are plentiful people take jobs. In some places where education is solid and poverty is low, unemployment will approach 2% in good times.

Why is Mulligan wasting his and everyone else's time trying to get us to worry about whether the remaining 2% are getting away with something. And does he really deserve the professional civility Dean offers here?
striking workers with high unemployment is the real anomoly
written by pete, July 18, 2013 4:42
SF Bart and other folks seem to have a high degree of leverage, able to strike even when unemployment is quite high. These sorts of behaviors are quite revealing. In 1937 labor also negotiated large wage increases, even though the "recovery" was fragile. The result was of course a big double dip.
written by JSeydl, July 20, 2013 7:14
Catching up after a long vacation, but this is a very nice post, Dean.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.