Redesigning Unemployment Insurance

How does unemployment insurance work?

From the worker’s perspective, unemployment insurance isn’t detectable unless the worker loses their job. Once that’s happened, the person can apply for benefits – a check that you can cash or deposit into your bank account. These benefits vary by state, with the composition of your family, and your income prior to separation. The most generous maximum benefit is provided by Massachusetts at $823 per week for an individual and the least generous is provided by Mississippi at $235 per week. States also vary by the length of time for which a person can collect benefits. Montana is the most generous at 28 weeks and North Carolina ties with Florida for the least generous at 12 weeks. If you find a job and become employed before the maximum benefit duration, then you stop receiving payments.

From the employer’s perspective, unemployment insurance is the premium that you pay per employee each year. The premium is not optional – so it’s a tax. Employers pay it for the privilege employing workers. There are two components of the tax: a state and federal portion. The federal portion is more or less constant per employee. The state portion changes with the incidence of unemployment claims and payments that a state makes in the prior year. When a lot of people get fired, state unemployment taxes rise as a policy response.

Why provide UI benefits?

There are two typical reasons for governments to provide unemployment benefits – and a 3rd not-so-typical reason. The first is as a matter of relief. People often lose a job through no fault of their own, and we don’t want those people to become destitute or to forego the bare essentials that money can afford. The second reason to provide benefits is as a matter of macroeconomic spending stimulus. Contrary to popular belief, this stimulus is not about encouraging greater production through greater sales. The stimulus is meant to encourage total spending in the economy to be higher than it would have been otherwise (See Irving Fisher on debt deflation and Scott Sumner on NGDP targeting). The 3rd and not so typical reason for governments to provide unemployment insurance is to keep people from going to work (See Tyler Cowen for why this might be desirable during a pandemic).

Incentives Matter

The 3rd reason above hints at a problem. People lose benefits when they become employed again. It is exactly because benefits provide relief that they reduce the incentive to find a job. Importantly, this is not a judgment of propriety or moral chastisement. It simply is the case that UI payments make being unemployed a little more tolerable. The tenacity with which people search for a job becomes a little less urgent. Anyone well acquainted with human nature (outside of a textbook) will tell you that it is good for humans to work. There are economic, social, and psychological benefits – not to mention the material benefits enjoyed by society. So, longer periods of unemployment are a problem.

Not only does the receiving UI benefits cause longer unemployment spells, losing benefits when you find a job acts as a penalty to finding a labor market match. It’s not happenstance that people who lose their UI benefits tend to become employed shortly thereafter. In terms of economic activity and gains from trade, society is materially better off when people find jobs more quickly (probably socially better off too). If you can get people to acknowledge the above logic, then there is plenty of room for people to disagree on the propriety of the UI benefits system.

Remove Disincentives – Keep the Relief

As Thomas Sowell is known for saying “There are no solutions – only trade-offs.”  That’s true. It’s also true that there is also no such thing as a free lunch. But some things are a lot more like a free lunch than others.

Wouldn’t it be nice if we could just help unemployed people and not disincentivize them from finding a job? In part it’s impossible. The UI payments do both and there is no separating them. But, the disincentive provided by removing payments when a job is found can be addressed. Why not just permit UI benefits even after someone has found a job?

An Outlay Neutral Prescription

What does the social program designer consider? Simply, the policy maker considers government outlays, government revenues, and economic impact. All else constant, policy makers like small outlays, high revenues, and good economic impacts.

I propose that states adopt the following policy. First, eliminate variables benefits. This part of the policy is not essential, but it clarifies the exposition. Now, it doesn’t matter whether you were an executive at a bank or a janitor at the bank – both receive the same weekly UI payment if they lose their job. What should the benefit be? For the purposes of outlay neutrality, the new benefit is the same as the average benefit was last year. The average benefit and total outlay across all claimants is unchanged.

When a person finds a job under the current system they are paying an implicit tax when their benefits get pulled. Let’s eliminate the employment disqualification. That’s right. When a person finds a job, they just continue to receive benefits. They don’t receive UI benefits indefinitely, however. In order to maintain outlay neutrality, the duration of UI benefit payments will be equal to the average duration last year.

Say what?!

Put yourself in the shoes of the person looking for a job under the current system. Say that your UI benefit is $800 per week and that you job-search for 10 hours each week. Say that you find a job that pays $1,000 per week. If you take the job, then you will go from working 10 hours per week to working 40 hours per week. And, you go from having an income of $800 per week to having an income of $1,000 per week. In other words, you get to work 30 more hours per week for $200 more income. The unemployed person is making the decision to take the job at $25 per hour, or stay home at $80 per hour ($1,000/40 Vs $800/10).

But what’s the perspective under the outlay neutral proposal in which the benefits continue even after employment? The decision is substantially different.  The unemployed person is making the decision to take the job at an average of $45 per hour, or stay home at $80 per hour ($1,800/40 Vs $800/10).

Of course, staying home still might look attractive. But it looks relatively less attractive than it did under the standard system of work-disqualifying benefits. If a person has 4 weeks of remaining benefits when they find the job, then continuing to receive UI benefits would mean that the total income over that month would be $7,200, versus $3,200 from staying home, or $4,000 under the standard system. Again putting yourself in the shoes of the unemployed, doesn’t this decision look different? Might you feel enticed to accept the job?

Under the proposed policy, government outlays are constant – there is no change in expenditures. Revenues increase because more employed workers means more employer-paid UI tax payments (not to mention other tax payments). Economic performance improves because greater employment increases total output. Let’s go ahead and throw in the additional social benefits too.

People Have Feelings

…And they’re complicated. Part of the sympathetic idea of unemployment insurance benefits is to provide relief. As a matter of gut instinct, this is why many people favor the UI transfer program over others. They can imagine themselves in such a circumstance through no wrong-doing of their own. But once we say that benefits will continue – even after someone finds their job – the UI program becomes less obviously a matter of sympathy-inducing relief. There is a political problem.

I say: put your feelings aside. Let’s get people employed again. Let’s increase tax revenues and increase economic activity. Let’s address the problem of unemployment in a better way – and spend not a dime more doing it.

Streaming Content: Scattering Vs Dumping

Like a good millennial, I don’t have cable. Instead I have Netflix, Amazon, Hulu, Disney+, YouTube, and a free trial of Apple TV. And before you say that I’m spending just as much as I would have spent on cable, just – no. First, I am not. Second, I have way more capability and discretion than I ever had with cable. Each of these streaming services now has their own studio(s) and competition is causing them to produce some content of exceptional quality. And, they differ in their decisions scatter vs dump. Amazon and Apple TV scatter their new episodes on a weekly schedule. You can still watch the episodes whenever your heart desires once they’re released. But if you are up-to-date, then you must wait 7 days until new episodes are available. Netflix, on the other hand, dumps out a new series all at once. You can spend the afternoon (or morning, or night) watching an entire season of the newest content from a high-end studio.

If we take a look through the way-way-back machine, then we can observe must-see-TV on NBC in the 1990s. Networks followed the scattering model. Most people didn’t own a DVR and on demand wasn’t really a thing except for pay-per-view. VCR (video cassette recorders) were ubiquitous, but people enjoyed watching their shows as they were released rather than later watching a recording. The 90s and early 00s were a special time for NBC in particular: Friends, Seinfeld, Frasier, 3rd Rock from the Sun, and ER were all a part of the weekly line-up – with Will & Grace and Scrubs soon following the finale of Seinfeld.

New weekly episodes that were released during a literal ‘season’ of the year had been the model for as long as television signals had been broadcasted. Several of today’s streaming services still adhere to the 80-year-old practice.

Why?

I’ve got 3 reasons for why streaming services still scatter new releases. The first is the one I that have the least to say about: Buzz. It’s good marketing for a show to be released over a longer period of time. In a world of social media, the longer the time that a show is salient in your life, the greater the opportunity for you to share the show with your friends or for critics to acclaim (or pan, as the case may be). It’s a marketing tactic. If all of the episodes in a season were released all at once, then a show would be in-and-out of your life like a stray ice cube that goes rogue from the refrigerator ice-dispenser. You care for a bit. But soon, it’ll evaporate and never be a concern again. I’m not an expert in marketing. So I’ll just leave it at that.

The second reason is due to the time value of money. The sooner that we can enjoy revenues and the later that we can push costs, the better. It’s true for multiple reasons. Financially, every day sooner that you receive a dollar is an additional day during which you can earn a return by investing it elsewhere. For ease, let’s hold the schedule of costs constant and just worry about the revenues. If a streaming service releases episodes weekly, then episodes can start dropping before the season finale is even completed. There’s nothing that says that the whole season has to be ready by the time the first episode is released.  And, when episodes are released earlier, would-be viewers are sooner willing to sign-up and become paying customers. Releasing episodes weekly allows a studio to increase revenues before the whole product has finished production.

The 3rd and final reason for streaming services to release on a weekly schedule is due to the subscription structure of marginal revenue. Streaming services earn *no* additional revenue per episode viewed by customers. The marginal revenue earned from paying customers comes from subscriptions. That is, each month of a subscription is revenue for the streaming service provider – no matter how many episodes a subscriber watches. Therefore, if a season is released piecemeal, then it increases the number of weeks during which the streaming service receives revenues from the customer. Of course, people could just wait until all of the episodes are released and then subscribe for a single weekend of lethargic binging. But that can only happen when a viewer is comfortable with forsaking the frontier of new video content. That would mean that a viewer is out of fashion and out of the conversation that their friends and co-workers are having. And if this sounds like small potatoes, then keep in mind that such conversations are often about signaling belonging, comradery, and cultural sophistication. Many people are inclined to stay up-to-date on TV, the news, and sports and therefore have a greater willingness to pay.

There you have it. The 3 reasons for streaming by scattering over weeks rather than dumping all at once are 1) More persistent saliency among viewers and potential viewers, 2) Sooner rather than delayed revenues, and 3) More periods for which streaming service can charge their customers for new content.

I only have one explanation for why some streaming services do in fact dump an entire season at once. Netflix does it on the regular and Amazon started doing it in the past several years too. I suspect that they do it as a means of attracting a particular market segment: binge-watchers. There being two players who compete on this margin may make either provider appear less attractive for consumers who desire new, binge-worthy content. But, luckily for Netflix, streaming content providers aren’t in a perfectly competitive market. That content an imperfect substitute means that it’s monopolistically competitive. And, for the moment, that means higher profits. The keen reader will recognize, however, that zero long run economic profits are also implied.

Inequality VS the Environment

What do we know?

We know that density is good for most environmental measures. With greater density comes less water runoff, less carbon emissions, less burned fossil fuel. With density, fewer people own vehicles, implements of yard curation, and we require fewer roofs per person.

What else do we know?

We know that in a static economy, progressive taxation makes after-tax incomes more equal. There are formal models that say the same thing about dynamic economies. Progressive taxation results in more income equality, and regressive taxation results in less. For clarity, income tax progressivity is determined by percent of income paid in taxes. When the rich pay a higher percent tax rate, that’s more progressive.

Are you ready?

Wealthy people tend to have more valuable land. That is, they improve the land and the things built on it. Do you want to tax land progressively? Then what you want is a property tax with a sliding tax rate. This way, you can make those rich people pay their ‘fair share‘. Even without a sliding scale, rich people will pay more dollars for their improved land.

Uh-oh.

Now that we are taxing property on land proportionally, rich people are seeking alternatives. They’re trying to avoid taxes! What do they do? Well, a smaller and cheaper house is a nonstarter. What is all that wealth for, if not to enjoy it partly through one’s home environment? The rich are going to find a place to live where they can be comfortable and where their property taxes are lower. Maybe a place where the land is not so expensive. Hello rural estate!

Do you want a proportional property tax so that rich people pay for the value of their property? Be ready to say hello to suburbanization and sprawl. All those benefits of urbanization mentioned above? Invert all of them to see the results.

Okay…

I see the attraction of taxing immovable property. Taxing a residence is nice for the government because the tax revenues are nice and stable, given the relatively inelastic demand for real property.

If only there were a real property tax scheme that provided stable revenues and encouraged urbanization… Well, the answer is not to try taxing the value of the land without taxing the value of property. What am I? A Georgist?

A Georgist I am not. But, I do have an affinity for lump sum taxes.

If, as a polity, you want urbanization, then impose lump sum taxes per area of land owned. Doesn’t matter if it’s a house. Doesn’t matter if it’s commercial. Doesn’t matter if it’s unimproved farm land. Just sit back and watch the skyline rise, our environmental footprint shrink, and plenty of land being turned into wildlife preserves and parks.

Oh dear.

People have feelings. Consider a beautiful multi story single-family home on an acre. Now consider a mobile home with a large yard and some trees – also on an acre. With a standard, flat proportional property tax, the owner of the big pricey house pays more. With lump sum taxes per square foot of land, they pay the same dollar figure. In other words, the less wealthy person pays a higher proportion of his properties value in taxes. In case you missed it, this beautiful solution to sprawl and environmental degradation comes hand-in-hand with proportional regressivity.

BTW:

I live in Collier County Florida. If all of the land, excluding surface water, in the county was taxed at the same lump sum per square foot, then we would need to pay about $1,600 per acre in order to replace all revenues currently collected from a variety of sources. If we assume that government property is excluded from the tax and we assume that the government owns a very liberal 10% of all property, then it is more like $1,780.

I haven’t even discussed all of the improved economic performance that an already developed counties might enjoy by eliminating the distortionary excise taxes and ad valorem taxes. I don’t know about you, but $1,600 doesn’t sound too bad in exchange for eliminating all the other nickel and dimes that add up to quite a bit.

(Just as I am not a Georgist, I am also not a revolutionary. We need not jump in head-first. We could ease our way into such a system. We’d just add a fixed lump-sum portion to existing property tax bills that increases over time. Property taxes bills would be calculated slope-intercept style with a portion being constant and a portion being dependent of property value.)

Have you heard about Human Capital?

While writing a paper recently, I was reminded of the importance of economic modelling.

Macroeconomic models are fun to rag on – everybody does it. But all economic models help us to express our understanding of the world clearly and help us to be specific when the temptation to hand-wave is strong. After all, a model is just a fancy way of saying “a system of logic”.

The paper linked above is several revisions in. What you don’t see are the mistakes that my co-author and I made along the way and the vagueness that we had to resolve. An earlier version of the paper simply stated that deaf people were endowed with less human capital than people who could hear. So far so good. But then we said that it was ambiguous who, the deaf or the hearing, would ultimately have more human capital after making additional human capital investments.

But this is not the case!

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Penny-Pinchers Gonna Pinch

Text books say that there are two major problems with the Consumer Price Index (CPI). First, accounting for changes in quality is difficult. Second, the CPI is calculated by assuming a fixed basket of goods is consumed over time. For both of these reasons, the rate of inflation that is implied by CPI is typically considered to be about 1% overestimated.

Imperfectly accounting for quality improvements causes higher measured inflation because the stream of services that a product creates for the consumer has increased – even though the product is nominally the same product. For example, the camera on my smart-phone is now good enough to record a high-quality Youtube video, whereas it was of mediocre quality on my previous phone.  My life is better-off with the better camera. But the increase in my quality of life isn’t measured by the CPI. The CPI does, however, make note that I paid a higher price for a phone.

Further, people don’t consume a fixed basket of goods over time. Even if we stopped the introduction of all new products and maintained the quality of all current products, people would still change the composition of their consumption due to price changes among related goods.

When people get hot and bothered by inflation, they often appeal to people who are of less means and who would find higher prices more burdensome. For that reason, below is a graph of some calorically dense and roughly comparable food staple prices (from the PPI).  You can put a protein on top of any one of these and call it a meal: pasta, flour, potatoes, & rice.

Let’s say that a consumer consumed equal parts of these in January of 2020. The CPI assumes that the consumption basket remains constant and plots a weighted average. In such a case, price rose 2.3% through July 2021. But in real life, penny-pinchers gonna pinch. If our consumer is particularly Spartan, then he will always consume the cheapest option – he treats the different foods as perfect substitutes. The Spartan price of consuming *fell* 22.3%. To be clear, the CPI assumes that the consumption composition remains unchanged, while the consumer’s actual basket is responsive to price changes.  Even if a consumer considers these goods to be imperfect substitutes and is willing to cut any particular type of consumption in half in favor of the cheapest alternative, then the price fell by 10%. In fact, a consumer who is at all responsive to prices will always have a cheaper basket than the headline CPI, all else constant.

In conclusion, be careful with your money. Spend it well and seek out alternatives. Your flexibility determines how much money you’ll have at the end of the month. The headline CPI number impacts only the most passive consumer – and even then, budget constraints gonna constrain.

A Canned-Beer Kind of Guy

An  ex-co-worker was once complaining to me that the prices of things that he liked kept going up.

He was an economics major. Of course he knew that wages also increase. He wasn’t simply cantankerous about inflation. He knew all about improving productivity, income, and price level changes. He was being more specific. The *particular* items that *he* liked were getting more expensive. He was complaining about what, to everyone else, were relative price changes.

Unrelatedly, I was floating around the bls.gov website and examining their Producer Price Index (PPI) FAQs (I learned a bunch). The content is extensive. CPI is broken up into some subcategories. But PPI, being used by multiple industries and trade groups for real-life costs and benefits, is excitingly granular.

You want to know what happened to the price of red, white, rose, and carbonated wines each in particular?  They’ve got you covered. It really is amazing.

Back to my co-worker. I tried to explain that relative price changes reflected underlying economic value and scarcities. We wasn’t having any of it. He just didn’t want his prices to go up. We economists are known for being kind of dispassionate. We see relative prices change and we shrug. Man-on-the-street sees a relative price change and, boy, does he care about it – if it’s the purchasing price that *he* faces.

See the below graph. What kind of consumer are you? Since the start of the pandemic, canned, bottled, and kegged beer have all changed in price. Or maybe you’re a teetotaler and you’ve noticed the increasing price of bottled water.  For interpretability, let’s consider what had cost $10 at the start of the year 2020. Bottled water has gone up to $10.50 and bottled beer has gone up to almost $10.30.  You may not blink at a 3% price increase – unless it’s for 6 bottles of your favorite craft beer.

The price of canned beer, on the other hand, hardly increased at all. And in the last couple of months, the price *fell*. I sure hope that my co-worker is a canned-beer kind of guy. Otherwise, someone is sure to hear a lot of belly-aching.

Hyperinflationary Efficiency?

I’m advising a senior thesis for a student who is examining the strength of Purchasing Power Parity in hyper-inflationary countries. Beautifully, the results are consistent with another author* who uses a more sophisticated method.

For those who don’t know, absolute purchasing power parity (PPP) depends on arbitrage among traders to cause a unit of currency to have the same ability to acquire goods in two different countries. If after converting your currency you can afford more stuff in foreign country, then there is a profit opportunity to purchase there and even to re-sell it in your home country.

Essentially, when you make that decision, you are reducing demand for the good in your home country and increasing demand in the foreign country (re-selling affects the domestic supply too). Eventually, the changes in demand cause the prices to converge and the arbitrage opportunities disappear. At this point the two currencies are said to have purchasing power parity – it doesn’t matter where you purchase the good.

So does PPP hold? One way that economists measure the strength of PPP is by measuring the time that it takes for a typical purchasing power difference to be arbitraged away by 50% – its ‘half-life’.  The more time that is required, the less efficient the markets are said to be.

The ex-ante question is: Is PPP be stronger or weaker during hyperinflationary periods?

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Singing IPUMS Praises

This is a late post, but I just want to sing the praises of IPUMS.

I first encountered IPUMs data in Sacerdote’s paper on intergenerational human capital transfers in which he showed literacy rates by birth cohort throughout the 19th century (figure 4 is downright beautiful). I’ve since dug-in myself concerning school attendance and human capital.

In the papers that students write in our econ elective classes, it’s not unusual for them to contain FRED data. Given that we don’t teach time-series, the papers are usually empirically weak. But this semester in my Wester Economic History course, I’ve encouraged student to utilize IPUMS. There are 4 students who are using it whose ideas I will surely publicize in the future:

  • Historical patterns of deaf employment, education, human capital, & income
  • The economic impact of the Brooklyn bridge
  • The composition of US interstate migrants relative to their host state
  • Patterns compulsory schooling

IPUMS is so darn rich. I strongly recommend it if you haven’t yet taken advantage of it.

The Tall and Short of Student Experience

Every semester in my intro STAT course I have my students create a variety of survey questions. After I combine their questions into a single survey, they collect responses from the student body at Ave Maria University. Most of the questions are vanilla. Other are not. They typically get in excess of 100 responses from the ~1,100 person student body.

While exploring the data, I found a really beautiful example for the week that we spend on multiple regression and dummy variables.  The survey results illustrate a clear, linear association between student height (inches) and their student experience at AMU (scored 1-10).

So strange! Why might this be? Except for that solitary 7 ft+ student on the basketball team, how in the world might height matter for student experience?

As it turns out a separate relationship holds the key.

Confirmed with a simple unpaired t-test (unequal variances), women rank their student experience much more highly. For this, students have multiple explanations at the ready.

  • Our school is in a rural location and women are more socially satisfied.
  • Men are less happy generally.
  • Men are less studious or have lower grades.
  • Men get less sleep and stay up later

The list goes on and I don’t know what the reasoning is or which ones actually play a role. But what I do know, is how to make fun scatterplots in Stata. As it turns out, if you control for sex, height loses all of its effects on student experience. Men are taller on average and they aren’t happy students relative to women (apparently). We can see in the figure below that all of the action in the two fitted lines occurs in the intercept. The slopes are practically flat for both men and women. In other words, height neither adds nor subtracts from a student’s experience rating.

What’s going on is that neither men’s nor women’s experience is affected by being taller. But, what’s actually going on here – you know – statistically? The simple version is that the bar chart above dominates the scatter plot. If we subtract the mean male experience score from the male values and do the same for the females, then we’re left with what is practically white-noise. How do all those other students of a different height experience the world? Well, as students, not so differently from you.

Compulsory Schooling by Sex

My previous posts focused on the aggregate school attendance and literacy rates for whites before and after state century compulsory schooling laws were enacted. When aggregates fail to deviate from trend after a law is passed, the natural next step is to examine the sub groups.

How did attendance rates differ by sex before and after compulsory school attendance? I’ll illustrate a plausible story. Prior to law enactments, boys attended more school because girls were needed to perform domestic duties and the expectations for female education was lower. As a result, boys had higher literacy rates due to higher school attendance. After law enactments, both girls and boys attended school more and the difference between their attendance rates is eliminated. Similarly, literacy rates converge and differences are eliminated. In short, the story is consistent with an oppressed – or at least disadvantaged – position for girls that was corrected by compulsory schooling.

Formally, the hypotheses are:

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