Do Generous Welfare Benefits Lead To High Unemployment? (Short Version)

(This is a shortened version of my last post. Essentially I shortened it, removed all the technical economic terms and put into plain English. If you want to see my sources and the evidence I base this article on then see the last post.)

It is commonly stated as fact that generous unemployment benefits leads to high unemployment. The argument is that people won’t bother getting a job if they can get paid for not working. It is often declared that there is more money on the dole than in a job and that the only problem with the unemployed is that they lack motivation. However there is little or no evidence to support this belief. Countless studies have been done without finding the supposedly large disincentive effect. In fact countries with generous welfare benefits (such as Sweden and Denmark) have on average lower unemployment.

The reason for this is that a job is not simply a way to make money; it is also part of an individual’s identity. People are defined by their occupation. Surveys reveal that many people would work even if they didn’t need the money. It is socially unacceptable not to work, so the unemployed therefore suffer a loss of respect. Unemployed workers suffer psychological damage from their lack of a job, such as loss of self-esteem, self-respect and a feeling of hopelessness. They suffer from a higher rate of mental illness than those working and gain a boost in mental wellness when re-employed. The orthodox theory does not take into account the fact that many workers gain self-fulfilment from their work, rather than merely seeing it as a way to pay the bills. There is no evidence that they suffer from a lack of work ethic either. A study found that unemployed men would have to receive 33,500 euro to bring their level of life satisfaction to the same level as employed men. For women the figure is 68,500.

The traditional theory ignores inconvenient facts such as the fact that many unemployed workers are not eligible for unemployment benefits or the full range of allowances. One study showed that only 30% of those classed as unemployed were receiving benefits in America. The figure was 26% for the UK. There are many restrictions on receiving allowances. For example if you quit your job voluntarily you may not qualify. Likewise if you refuse job offers you can be disqualified. Many allowances apply only to families, whereas most of the unemployed are childless. These findings apply both in Ireland and abroad. Only 11% of the unemployed in Ireland receive rent allowance. In fact, a study found that 97% of those unemployed in Ireland in 2011 would improve their financial situation by getting a job. The average unemployed person received a 60% of their previous wage. In most countries it is necessary to have worked a certain length of time before it is possible to receive benefits, this would actually cause benefits to have a positive rather than negative impact on participation in the labour force (this point was admitted by Milton Friedman of all people).

Similarly, the duration people can claim unemployment benefits has a negligible effect on unemployment levels. Nor does the level of benefits compared to wages. The difficulty in qualifying for benefits also has no effect on unemployment levels. No matter which way you look at it, welfare benefits do not cause unemployment.

After drawing together different studies, viewpoints and opinions it is clear that the disincentive effect that is supposed to affect the unemployed is greatly exaggerated. The conventional wisdom is simply not supported by facts. In fact most available data contradicts it. The orthodox model fails to give an accurate description of the real world, instead relying on overly simplistic assumptions. It ignores features of welfare systems that prevent people from receiving assistant, such as means tests and work tests. It ignores the stigma associated with receiving hand-outs and the psychological damage unemployment does. It glosses over the non financial benefits people gain from work. Contrary the orthodox opinion, generous welfare benefits do not lead to higher unemployment, longer durations of unemployment or a disincentive to work.


Filed under Economics

6 responses to “Do Generous Welfare Benefits Lead To High Unemployment? (Short Version)

  1. Very thoughtful–I remember a similar study done about the minimum wage showing that it had virtually no effect on unemployment unless it was very, very high (after all, McDonald’s wasn’t going to close just because it had to pay a buck more an hour)

  2. It is heartening so see someone taking a logical, considered and practical approach to benefits. Far too often progressives are boxed into a corner when discussing them, and fail to point out the flaws in crude assumptions that are made.

  3. Really interesting. And congratulations!

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  5. chelsie

    I am sorry to say but your paper is kind of all over the place i understand that you are trying to make a point but you focus on to many different countries in stead of two or three. And also I would have to add that you did not look at the fact that most Americans will lie for money because they are greedy self-centered people. (and i said most not all) Not only that, there are several other types of welfare, not just unemployment. So you should of stated your paper was just about unemployment. Just thought i would let you know how some one who thinks people do use the system feels about what you wrote.

    • “And also I would have to add that you did not look at the fact that most Americans will lie for money because they are greedy self-centered people. (and i said most not all) ”

      Do you have any facts, evidence or studies to prove this?

      “Not only that, there are several other types of welfare, not just unemployment. ”

      True but unemployment benefits are the ones most relevant for discussing unemployment levels.

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