Casey Mulligan is Right Again

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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.