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The System of Dependence: Do We Need Unemployment Benefits? by Daria Fedotova

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The System of Dependence: Do We Need Unemployment Benefits?

In 2020/21, unemployment benefits cost the UK taxpayer £1.56 billion. According to Reuters, the OECD counts the UK’s level of unemployment benefits as among the least generous across developed states. According to the International Labour Organisation, some countries on the Continent provide up to 77% of national average earnings for years, allowing able-bodied adults to remain idle for as long as they wish.

First introduced in Britain in 1911, the measure was a desperate attempt by the Liberal Party to save itself from the rising Labourists. It failed in that regard; the progress, so readily invited by the Whigs, was not to be stopped. Still, many saw unemployment benefits as a useful tool against communist ideas, capable of de-radicalising the workers. Thus, the ground was again ceded to the reformers, and today unemployment benefits are considered the norm worldwide. Eligibility criteria may vary across jurisdictions, but claimants are most commonly required to be over 18 years old, have had a previous job, be ready to work, and actively search for employment—or, at least, reasonably actively do so.

The main argument in favour of unemployment benefits is, of course, the necessity to help people who end up without a source of income while they search for a new job. Another, arguably more communist version, asserts that the government should hand out ‘free’ money to whoever needs it. The logic behind such measures is that they are necessary, first, to avoid social upheavals and, second, to ensure that the unemployed continue spending. The former is questionable. While some research, like the one published by Hamid Noghani Behambari and Bitran Maden in 2020, indicate that unemployment insurance benefits mitigate the effects of unemployment on crime statistics, others point out that it only works for a limited amount of time and only if a strong incentive to search for a job is provided. “[T]he provision of unemployment benefits, a natural policy response, can misfire if it generates behavioural responses that lead men to remain unemployed for longer,” states a paper published by the research network CESifo in 2021. However, it seems wrong to pay people not to commit crimes, shifting the responsibility away from the criminal and onto the society: if one resorts to burglary instead of working in a fast-food restaurant, it is a personal choice that should be punished accordingly.

As for the spending, it is logical for the unemployed to reduce their consumption compared to the periods when one earns a steady wage. “At unemployment, households spend on average 7% less on groceries than similar employed households,” reported Gabrielle Penrose and Gianni La Cava in 2021. “The effect on eating out is much greater, with spending falling by 43%.” Their research further indicated that spending habits did not normalise for another three years after household income stabilised. On the one hand, it hurts the economy, though not significantly in normal times; on the other, it motivates people to return to their preferred comfort level, and so the situation is essentially self-regulated.

There is also an emotional side to the matter. The government cannot let people suffer, especially the “vulnerable” and “marginalised.” But this is a flawed view. Given enough resolve and ingenuity—and sometimes even just one of these will suffice—anybody can put food on the table in a perfectly legal way. It is unwise to increase dependence on the state, as no community benefits from it in the long run. Moreover, it often breeds abuse.

The most common way to take advantage of the system is to stop searching for a job, thus remaining a burden on the taxpayer for a longer period: all needs are met, so there is no urgency. According to the Federal Reserve Bank of St. Louis, “the time devoted to job search drops by about 16% when unemployment benefits increase by 10%.” In theory, unemployment insurance benefits–distinct from state employment benefits–exist so that high-skilled professionals can afford to spend more time searching for a suitable workplace rather than take anything that feeds them. However, these professionals are also more likely to have savings to support them for a certain period. The 2019 Federal Reserve Survey of Consumer Finances suggests that the holders of a college degree have an average of $78,890 in their bank accounts. Meanwhile, the low-skilled workers rely on taxes.

Why endure work routine, long commutes, and hated bosses if one has an opportunity to sit back and enjoy even larger payments from the government? Not only is it simple, but it is also often more profitable. In May 2020, CNBC published an article stating that “roughly 40% of workers stand to make more money while unemployed than from their former jobs.” This is particularly true for the leisure and hospitality industry, which was hit the hardest during the pandemic; as a result, business owners have trouble hiring employees. The US government, in turn, resorts to printing money, thus causing inflation, and making the situation even worse.

Another massive problem with the unemployment benefits system is that it is highly vulnerable to fraud. “[A]t least $26 billion in benefits could be wasted, with the bulk of that going to fraudsters,” CBS News reported in 2020. “The scope of the crisis is not yet known, though the early estimates are eye-popping: California officials have identified at least $11.4 billion in fraudulent claims, and they suspect another $20 billion may be fraudulent,” wrote The Hill in 2021. Millions more were allocated to combat the abuse, on top of the already existing administration costs. And all that, once again, falls on the taxpayers’ shoulders.

If not abolished altogether, unemployment benefits should be cut drastically, and their duration limited to a month or two. Currently, the UK and the U.S. support eligible claimants for six months, and many European countries offer even more extended periods. Germany, for example, sponsors the jobless for a year, France and Denmark for over two, the Netherlands over three. Yet how much time does a person need to find suitable employment? Most countries use sanctions on those who cannot prove they are searching, but as we have already seen, they are not effective enough.

It is true that the decrease in spending and rising poverty do not benefit the economy, and most developed states reasonably seek to avoid those. But it is better to create job opportunities than just giving money away: in both cases, the proper consumption levels are upheld, while the latter also fulfils the needs of the state and its communities. It takes a lot of specialists to build an aircraft carrier, research cutting-edge technologies, renew an old building, and keep the streets of a megapolis in good order. Private enterprise should be encouraged, and, needless to say, measures as crippling as the recent lockdowns are best avoided.

There is also a private alternative to state-funded unemployment insurance. “About 6% of the working population of both Britain and Germany claimed to possess private unemployment insurance,” claimed a study from 2010. “A further 23% in Britain and 12% in Germany expressed an intention to acquire private unemployment insurance.” Built on the market principles of fair competition and voluntary consent, it is arguably a better option for all except those who wish to leech off the taxpayers’ money.

Unemployment benefits are unnecessary; moreover, it is a morally dubious practice that makes one group of people dependent on a state and the other responsible for feeding them. And though it is unlikely to disappear, it can and should be scrutinised.

Daria Fedotova is a lawyer and writer based in Ukraine.

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