Families, Not Relief, Still Safety Net

MARCH 18, 2011

By WAYNE LUSVARDI

With implications for California budget discussions, a new study shows that unemployment benefits delay the time the jobless find work. The study comes out at a time when California’s unemployment rate of 12.4 percent remains the second highest in the nation, after Nevada’s 14.2 percent.

“Life Cycle Shocks and Income” comes from the Federal Reserve Board of San Francisco. According to a summary in the Wall Street Journal, the study concludes that Unemployment Insurance Benefits (UIB) mainly “provide incentives for prospective workers to keep looking for better jobs rather than accept less attractive positions.”  This finding has implications for California Unemployment Insurance policies.

The key finding of the study is that the unemployed don’t depend on government to offset economic losses, although the disabled depend on government in the short term.  Six years after losing a job, becoming disabled or getting divorced, any individual loss of income is offset by increased family income, as shown in the table below excerpted from the study.

Table 1 – Life-Cycle Shock Effects on Income Levels
(Mean average value in dollars)
6 Years Prior Event 6 Years After
JOB DISPLACEMENT
+ Own Labor $42,325 $35,679 $30,966
+ Total Family $78,104 $68,886 $76,059
DISABILITY
+ Own Labor $31,526 $30,069 $29,178
+ Total Family $63,497 $72,919 $73,860
DIVORCE
+ Own Labor $39,119 $42,465 $43,749
+ Total Family $76,772 $61,682 $77,393
Source: San Francisco Federal Reserve – “Life Cycle Shocks and Income”

http://www.frbsf.org/publications/economics/letter/2011/el2011-08.html

Six years before an economic “shock,” such as losing a job or a divorce, there was little difference between individual incomes.

On the other hand, those who ended up disabled had lower individual and family incomes six years prior. That confirmed research that work-restricting disabilities are more associated with those of a lower socioeconomic level.

In the year of job loss, divorce or disability, however, earnings fell as expected, only more so for families than individuals.  In the case of those disabled, family income actually was higher in the year of the event than six years later.  Those divorced suffered higher individual but lower family income in the year of the divorce.

Six Years After a Shock

But six years later, individual and family fortunes change. For those who lost a job, total family income recovers but not fully in six years, thus offsetting lower individual income. The disabled experience higher family income, also offsetting lost individual income.  But the divorced show significantly higher individual and family incomes. (This could lead to a lot of jokes on “positive” divorce.)

The San Francisco Federal Reserve study indicates that average loss individual income for the unemployed is $9,800 per year, which is offset by UIB in the short term.  In the longer term, other family member incomes (a/k/a “added worker effect”) cushion the loss by about $11,000, starting from the year of loss.  Current California UIB benefits extend to 99 weeks, or nearly two years.  Average UIB benefits are $840 per month.

As the study puts it:

However, on average, most post-shock family income comes from earnings of family members.  If a life-cycle shock causes the principal earner to lose income, other family members take up all or most of the slack by increasing their own earnings. The data suggest that Americans depend mostly on their own families for the resources necessary to weather unexpected economic events.

Waiting for the Right Job

The most controversial part of the Federal Reserve study is that the unemployed mainly use UIB Benefits to continue looking for a good job rather than taking a less satisfactory or less compensating job. UIB preserves social status, not merely income. In other words, UIB is as much a political subsidy as a lifeline, just as mortgage deductions are considered “welfare” subsidies.

Families, not welfare transfer payments, serve as a buffer against long-term individual losses.  There still is a viable “third sector” in society between individuals and large corporations and bureaucracies that continues to function as an economic unit, although it is largely invisible to liberal politicians, the media and the University of California Institute for Labor and Employment.

The Legislative Analyst’s Office reports that California’s Unemployment Insurance Fund will run a $20 billion accrued deficit through 2011, or about 23 percent of the entire State General Fund Budget.  California has been plugging this deficit with Federal Stimulus funds.  But by September 2011, it must starting paying $500 million annual interest, in addition to repaying the $20 billion Federal loan principal.

Employers pay for Unemployment Insurance Benefits (UIB), but legislators have been reluctant to impose higher UIB rates on employers due to the weakness of the economy.

Policy makers need to understand the implications of the Federal Reserve Board study before extending the Unemployment Benefit period further, providing any more generous benefits, or putting the state into further debt.

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  1. stevefromsacto
    stevefromsacto 18 March, 2011, 10:43

    Whether you agree with this study or not (I do not), this is all part of the ongoing effort by the Republican right to make the middle class pay for the cost of the Great Recession.

    Read and learn:

    Governor Scott Walker and a gaggle of Republican governors assault the right of workers to bargain collectively in states across the country. Teachers get laid off as school budgets are cut across the country. Colleges hike tuitions and shut down course offerings. Public workers face furloughs, layoff, cuts in health care and pension benefits. Congress is tied in knots about how much and what to cut. And Republican and bipartisan pressure to go after Social Security and Medicare is escalating.

    We should be very clear about what unites these stories, for these struggles will say much about what kind of America emerges from the rubble of the Great Recession.

    Who gets stuck with the bill for the Great Recession?

    From the tea party Republican caucus to the Obama White House, leaders of both parties have moved from worrying about the recovery to worrying about how to pay for the costs of the Great Recession. With 25 million Americans in need of full time work, this is bipartisan folly. With Japan melting down, the Middle East erupting, energy and food prices soaring, housing prices and starts sinking, states and localities enacting brutal budget cuts, it is callously irresponsible, risking a double dip recession that will explode public deficits.

    But that’s where we are — focused on who pays for the mess. Wall Street excess and conservative deregulation (by law and lassitude) blew up the economy, causing the Great Recession. The bankers were bailed out. Working families took the hit from the downturn — in lost jobs, lost savings, weakened pensions, declining home values, pay and benefit cuts.

    The recession blew a large hole in public finances at every level. Tax revenues plummeted. Expenses — from unemployment insurance to food stamps to public health — rose. Public pension funds suffered investment losses. States and localities face severe deficits with a mandate to balance their budgets. At the federal level, the recession doubled the national debt, and drove deficits up to 10% of GDP (much of this the result of plummeting tax receipts).

    Now the question is who pays for the damage?

    The Republican position is clear and consistent at every level of government. They want to send the bill to teachers, cops, seniors, kids, the poor and the vulnerable. From Governor Walker in Wisconsin to Governor Kasich in Ohio and across the country, Republican Governors and conservative legislators are pushing for deep cuts in education, jobs programs, and public health programs (particularly Medicaid). They are slashing spending while seeking in many cases to cut taxes for corporations and the affluent.

    That’s true at the federal level as well. Republicans went to the mat to extend tax breaks for millionaires in December, and now are threatening to close down government to slash spending on education, jobs programs, energy and the environment, and public health for the remaining months of the FY 2011 budget. And for next year’s budget, they are girding themselves to take on the core insurance programs — Social Security, Medicare and Medicaid — that provide the most vulnerable Americans — seniors, the widowed, the disabled — with some modicum of security.

    We aren’t buying what they are peddling

    This agenda is immensely unpopular. Americans have rather clear and sensible ideas about how to cut the deficit. They want Social Security and Medicare protected. They oppose cuts in education. They don’t like tax hikes on families that are already suffering pay cuts. With the growing and extreme concentration of income and wealth, voters support tax hikes for the richest Americans, imposing a surcharge on incomes above a million dollars. With Wall Street’s casino wrecking ruin, they support taxes on bank profits, and a financial speculation or transaction tax to slow computer driven speculation. With the Pentagon spending about as much as the rest of the world combined spends on their militaries, they’d start with cuts in the defense budget, as well as subsidies for Big Oil and other corporate interests.

    The more people become aware of the Republican agenda, the less they like it. In Wisconsin, Governor Walker hoped he could cram his legislation through a legislature under Republican control before people knew what hit them. But when workers mobilized, and Democratic Senators left the state, the voters got a chance to look at the Governor’s program — and his popularity plummeted. The same would surely be true of the public’s reaction to the cuts demanded by the House Republicans in Washington, were we ever to have a pitched battle over them.

    Dismember the Opposition

    That reality requires the second front in the conservative offensive: a frontal assault to weaken the ability of organized people to counter the power of organized money.

    Doing the bidding of corporations, banks and the wealthy insures that conservatives will have well stocked campaign coffers and deep independent expenditure money pots that can fund air and ground wars in support of their actions. Citizens United, the ruling written by the conservative gang of 5 on the Supreme Court, opened the floodgates to corporate money. Its effect — like that of Reagan firing the Patco workers — was as much symbolic as substantive, making it clear to corporate CEOS that this was the moment to go all in.

    But even the most sophisticated Orwellian ad and Astroturf campaigns have a hard time overcoming the opposition of organized people. So conservatives have set out systematically to weaken or destroy the opposition.

    That’s why core worker rights are under assault in states across the country. This isn’t about balancing the budget; it is about weakening the ability of workers to resist. Unions are the most potent opponent of the conservative agenda. With private sector unions weakened by globalization and the all out corporate assault on them over the last three decades, public employee unions — teachers, cops, fire fighters, nurses — are the leading edge of the opposition, and the leading target of the new attack.

    But it isn’t just unions. In states across the country, efforts are underway to strip students of their right to vote on their campuses, hoping to suppress the votes of the young. Various forms of requiring voter ID at the polling booth are being revived, seeking to depress the votes of seniors, minorities and the poor. Acorn, the most effective minority voter registration operation, is hit by a dishonest sting operation, ending with federal spending cut off. Planned Parenthood, a respected women’s organization with chapters across all 50 states, is another target, with an attack on its funding now underway. Tort reform is aimed at trial lawyers, a leading source of liberal funds, curbing both their ability to bring actions and to collect damages.

    The Big Kahuna

    The stakes in this debate go far beyond getting public budgets in order. At stake is what kind of a society and economy we will build coming out of the worst economic downturn since the Great Recression.

    Will we set in place the priorities and programs that can rebuild a broad middle class — or will we return to the pre-recession economy with Gilded Age inequality increasing, and the middle class an endangered species?

    Central to this is whether the democracy can rescue government from the clutches of predatory corporate interests and turn it back once more to an instrument of the common good. Will we bring our budget into balance by putting people back to work, and enacting progressive tax reform that sends the bill to those who helped create the mess, or balance it by cutting spending on education and other areas vital to providing opportunity to all? Will we take on the entrenched corporate interests that feed off government subsidy and privilege — or go back to business as usual?

    These questions are posed each day in Congress. Cut funding for schools or cut subsidies to big oil? Cut health care for seniors and the disabled or cut subsidies to the drug and insurance companies that drive up health care costs. Invest in rebuilding America, or continue to squander resources policing the world? Cut Social Security benefits that workers have paid for or require the wealthiest Americans to pay a higher tax rate than their secretaries?

    Here again, unions are central to the story. After World War II, unions represented about 35% of the private workforce. As productivity and profits rose and the country got richer, unions helped insure that workers — union and non-union — got a fair share of the benefits. We all grew together and created the great triumph of America — an American Dream that was within reach of a broad middle class.

    But after 1980, with globalization, the corporate offensive on unions, the conservative era in our politics, unions declined dramatically to less than 7% of the private workforce. Productivity and profits continued to rise. Contrary to conservatives, America isn’t broke. It generates more income now than it did a decade ago, and will generate more income in the next decades than it does now. America isn’t broke but its working families are struggling. That’s because they no longer share in the increased profits and productivity they help to create. The richest 1% captures fully 23% of the income in the society, and has more wealth than 90% of Americans, while most households lost ground when the economy was growing in the last decade. If the right succeeds in destroying unions, it will surely accelerate the destruction of the middle class and our descent into ever greater inequality.

    Conservatives are very clear about this. House Budget Chair Paul Ryan says the choice is between “European Social Democracy” and traditional American free enterprise. But he and his colleagues define social democracy to include the core institutions of middle class security and opportunity — Social security, Medicare and Medicaid, pensions, living wages, affordable health care, public schools, affordable colleges, etc. They are intent on using this crisis to rollback as much of this as they can. They know it won’t be popular so they are intent on crippling unions and other institutions that they know will stand in the way.

    The fight in Wisconsin and elsewhere for the right to bargain collectively isn’t divorced from the budget fights in Washington and the states. These are all part of a struggle for what kind of America we will build. No one can be a bystander in this debate.

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  2. Wayne Lusvardi
    Wayne Lusvardi 18 March, 2011, 11:25

    stevefromsacto:
    Here’s something else you won’t believe: the author of the above article is a government union member and Cal-PERS member who stands to lose if government benefits are cut back.

    Another unbelievable item: those receiving the full package of welfare (UIB, disability, food stamps, Medi-Cal, utility rate reducations, etc.) have about a $4,500 per year higher income than the median family income in California – see my article “Freebies Enrich Low Wage Workers” – http://www.calwatchdog.com/2010/11/29/ca-freebies-enrich-low-wage-workers/

    Recent newspaper headline reported that for some the only way into the middle class is a government job. So politicians have invented millions of make work government jobs to buy votes. Problem is that state and school district budgets cannot support huge artificial jobs work force in an economy that is falling due to a decades long debt supercycle.

    The “evil” Republicans aren’t the only ones who created this.

    What I’m writing about above is apolitical – how the “third sector” of mediating social structures of families, relatives, churches, lodges, and other nonprofit organizations not dependent on government monies absorb individual and family economic losses. The solutions to economic decline are going to have to come from the “third sector” not from political parties, unions, or social policy (unless those social policies rely on the third sector). That may be why the number of “Decline to State” voters is growing in California – maybe they realize there is nothing for them to gain from a political party in California.

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  3. EconProf
    EconProf 18 March, 2011, 20:41

    My brother is a 60-year old union carpenter. Naturally, the recession put him out of work. As a stalwart union man, he is used to $32/hour jobs with fringe benefits. So for 99 weeks he took his very generous Unemp. Benefits and would not do side jobs or lower himself to take non-union carpentry jobs at the market rate for carpenters–perhaps $10-20 per hour.
    Finally, he became a school bus driver recently @ a respectable $16/hour. But for two years his skills and health deteriorated as he kicked back and took the fat government benefits. I blame the unions and the government benefits for his slide & am glad he finally faced reality.

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  4. Curtis Walker
    Curtis Walker 18 March, 2011, 20:56

    SteveFromSacto nailed it. I spent the last ten years before retirement as an Administrator of an Unemployment Insurance and can tell you a reduction in benefits means direct loss of profits for local business. Every dime of UI benefits goes immediately back into the local economy. If that is reduced Republicans may ascwell have increased taxes on biz, as their bottom line, in the case of CA is a pass along hit of 20 Billion dollars (or the same impact as a 20 billion tax increase) to biz.

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  5. Wayne Lusvardi
    Wayne Lusvardi 19 March, 2011, 09:13

    Curtis Walker:
    Your reasoning is circular. If you taken money out of the private sector it is no longer available for investment and more capital formation. Then we all get poorer.

    By not producing enough intact families who don’t depend on any sort of subsidies, we no longer have enough young families who need to borrow money for new homes and businesses and thus the retired get measly returns on their pensions and the state has pension shortfalls and we all get poorer. Trying to make up for pension shortfalls by high stakes gambling in financial markets will only lead to more financial meltdowns. Recirculating money from unemployment won’t fix this or our economy.

    Reply this comment
  6. David from Oceanside
    David from Oceanside 21 March, 2011, 08:24

    “Wall Street excess and conservative deregulation (by law and lassitude) blew up the economy, causing the Great Recession.”

    The foundation of Stevefromsacto’s treatise is flawed. Central control and government collusion with big business in setting the rules led to the meltdown. A history of bailing out failure added to the problem.

    Do you suppose the revolving door between government and wall street may have played even a small part. To suggest more government is a solution to a government induced problem is circular suicide.

    Free markets are self regulating.

    Why Liberals defend the blatant rent seeking of selected government workers at the cost of social programs is alarming. That they blame liberty as the cause of our problems is ignorant.

    Reply this comment

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