Subsidizing Unemployment

The 2010 Nobel Prize in Economic Sciences, awarded to Christopher Pissarides, Peter Diamond and Dale Mortensen for their work on Search Theory, has put the spotlight back on unemployment. Search Theory, when applied to the labor market, defines job search behaviors – those of the jobless worker who will consider ideal only a new job with a higher wage, equal or higher seniority level, most pleasant working conditions and desirable benefits.

Search theory also, however, describes a worker’s strategy when choosing between different available options, often choosing the one option with the most desirable combination of qualities.

In the United States, the Unemployment Rate remains considerably high at 9.6%. Employers continue to hire and seek talent. At the same time, State Unemployment Bureaus continue to extended jobless benefit durations to those out of work, some states providing benefits for more than two years.

Search theory has failed to factor in the reality that this country’s unemployed workers are, in short, enjoying subsidized unemployment periods to hunt for the ideal position. Is the typical worker unemployed for 39-52 weeks choosing between options or merely turning down anything absolutely “ideal”? If one of the unemployed’s options is to accept severance and a state check rather than heading out to work (which does sound quite ideal), rewarding this behavior with an unemployment subsidy does little to encourage choosing the option of new employment.

Severance packages offered to terminated employees in periods of high unemployment can be somewhat generous, as employers express concern that workers will remain jobless and without salaries for long periods of time. These beliefs, no doubt spurred on by State Labor Bureau statistics about unemployment durations, provide for terminated employees to be overpaid, and often double-paid when that individual goes back to work. Should terminated workers be encouraged to perform job-searching activities? Alternative separation benefits programs can do just that – getting the employees back to work and off the state’s payroll. Reflecting a true unemployment rate, not one created by state subsidies given to those who choose the far more comfortable option of not working.