8/10/2010
By David Urani, Research Analyst

The unemployment picture has become stagnant at a rate of 9.5%, and such levels still suggest a crisis level for our nation. It's understandable then that the government is anxious to put in a helping hand for those struggling with job loss, despite an already large strain on our country's finances. With moral issues like these at stake it's hard to say what the right answer is sometimes. Looking at it from a quantitative standpoint it got me wondering how extending unemployment benefits might be affecting the numbers of employed versus unemployed workers. A piece in the Wall Street Journal cites Michael Hatchell, who stayed unemployed for 59 weeks and turned down "more than a dozen" jobs because he would have made less than he was receiving through unemployment benefits. For those working at or near minimum wage levels, could there actually be a case for deciding not to take a job and living off of unemployment checks? Could government dependence be adding to the unemployment rate?

Breaking down the data, there appears to be a disconnect between the total level of employment versus the number of job openings. In fact, since January of last year, total private employment (we used private to sidestep volatility from the Census) is down approximately 3% while job openings have increased by about 15%. At the same time, layoffs have actually reverted to relatively low levels historically speaking, indicating that job losses should have slowed down enough for decent employment growth.

Could it be that people are generally more satisfied with unemployment? I pulled up some stats related to the issue:

• Federal minimum wage is $7.25. The average unemployment check is $293 a week, which is $7.33 per hour assuming a 40 hour workweek.
• 3.2% of workers more than 25 years old receiving hourly pay, or 1.8 million, make minimum wage or below.
• 52.6% of the minimum wage or below workers actually make less than minimum wage.
• It varies by state, but federal unemployment benefits currently last up to 99 weeks with extensions.

Of course, Mr. Hatchell's case is not reflective of everybody's situation considering he was in a position where his previous income had been enough to afford him unemployment benefits greater than minimum wage. Generally, unemployment benefits are a fraction of one's previous income. Then again there is likely a contingent, albeit perhaps a very small one, of people who are satisfied receiving the weekly pay check for unemployment, justifying a decrease in income with the luxury of not having to work at all. In the case of these, let's call them "lazy" people; one has to wonder what kind of sacrifice to income one is willing to make in order to take a free ride.  Of course, it's impossible to tell how many people fall into either of those particular situations but without a doubt someone in a similar situation to that of Mr. Hatchell's would actually be being prudent from an individual standpoint by taking the unemployment rather than the lower paying job. Such situations represent jobs that would have been filled had the lengthy unemployment insurance benefits not been available.

Certainly, the percentage of people rejecting job offers in favor of unemployment benefits for an extended period is a small number. There are currently 4.5 million people on unemployment benefits, and even if 10% of them are taking advantage of the system, which is a bullish estimate by my account, it would affect the unemployment rate by 0.3%. Still though, as we noted above, employment does not seem to be catching up to job openings. Without a doubt, the insurance of 99 weeks or more of unemployment checks is a good incentive to take your time and wait for the right opportunity. In that sense, our recovery is being delayed to an extent.

David Urani
Wall Street Strategies