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December 03, 2018

Will punishing the unemployed cure unemployment?

Opinion image

Many elections hinge on the state of the economy, and in particular the job situation. Therefore, the politician who wants to reduce unemployment may be inclined to dish out larger punishments to the unemployed who don’t look hard enough for jobs. 

But do the unemployed not search hard enough in the first place? Why wouldn’t they? If they receive unemployment insurance benefits, it is not so urgent to find a job. So the unemployed may delay searching for jobs until they run out of benefits. This would increase the time they spend being unemployed, and ultimately the overall unemployment rate in the economy. To limit such undesirable effects, the unemployed are typically required to search hard enough in order to continue receiving benefits. Experimental research in the US shows that job seekers whose search effort is not monitored at all do end up staying unemployed for longer. This supports the idea that people delay searching for jobs if they receive benefits and no one is looking over their shoulder.

So then, perhaps monitoring people even more stringently would decrease unemployment? Not so fast! Research shows that reinforced monitoring typically does not decrease unemployment and instead can have all sorts of adverse effects. For one thing, when people search harder and harder, they snatch away jobs from other people who do not search harder. Those who receive benefits may get ahead of the queue compared to those who do not receive benefits. When job opportunities are limited, this increases the unemployment rate for those who do not receive benefits. Therefore, while the unemployment of one group may decrease in response to tougher monitoring, the unemployment rate of another group may increase. The overall effect on the unemployment rate in the economy can then be quite weak.

Another downside of tougher monitoring is that people may take worse jobs. If it is urgent to find a job, people are willing to accept, for example, lower pay. This somewhat defeats the purpose. If people find a job faster, they get fewer benefits, so that is good for the financial health of the unemployment benefit system. But since the system is financed by taxes on wages, the lower someone’s pay, the less they contribute toward the unemployment insurance benefit system.

Finally, and perhaps most worryingly, tougher monitoring and sanctions can lead some job seekers to stop searching for a job altogether. Think about someone whose job prospects are very poor because of bad health. For this person, searching is hard and not very productive. Instead, they may apply for disability benefits. Research on the tougher monitoring of the unemployed in the UK has led to exactly this conclusion. 

Monitoring job search by the unemployed can play a crucial role in reducing unemployment. However, more and more stringent monitoring and sanctions are not a panacea. Policymakers must consider possible downsides, such as unemployed people accepting less stable and lower-paying jobs. Tying moderate monitoring to job search assistance may be the essential ingredient to make this approach successful. 

© Ioana E. Marinescu

Read Ioana E. Marinescu's full article, “Job search monitoring and assistance for the unemployed.

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