Utopia, you are standing in it!

Jeff Borland is a critic of work for the dole. He points out that they do not improve the job finding rates of participants and in fact reduce the amount of job search because work for the Dole participants are busy undertaking work for the dole requirements:

The main reason is that participation in the program diverts participants from job seeking activity towards Work for the Dole activity. Research on similar programs internationally has come up with comparable findings.

This made me wonder. If unemployment is caused by deficient aggregate demand, and otherwise is involuntary, how can work for the dole increase unemployment or reduce the rate at which people exit unemployment?

‘Involuntary’ unemployment occurs when all those willing and able to work at the given real wage but no job is available, i.e. the economy is below full employment. A worker is ‘involuntary’ unemployment if he or she would accept a job at the given real wage. Keynesians believe money wages are slow to adjust (e.g. due to money illusion, fixed contracts or because employers and employees want long run money wage stability), and so the real wage may no adjust to clear the labour market: there can be ‘involuntary’ unemployment.

Under the deficient aggregate demand theory of unemployment, people have no control over why they are unemployed – that’s why their unemployment is involuntary.

Sticky wages are no less sticky when work for the dole is introduced and people search more intensively for jobs. Deficient demand unemployment is no less deficient when there is an increase in job search intensity.

Work for the dole must be carefully defined, of course, to differentiate it from the failed active labour market programs of the past that attempted to improve the employability of the unemployed. By work for the dole, I simply mean mandatory work requirements simply make it more of an ordeal to be on unemployment and thereby encourage people to find a job.

Mandatory work requirements simply tax leisure. By taxing leisure,  mandatory work requirements  change the work leisure trade-off between unemployment and seeking a job with greater zeal and a lower asking wage more attractive option. More applicants asking for lower wages will mean employers can fill jobs faster and at lower wages, which means our create more jobs in the first place.

The probability of finding a job for an unemployed worker depends on how hard this individual searches and how many jobs are available: Chance of Finding Job = Search Effort x Job Availability

Both the search effort of the unemployed and job creation decisions by employers are potentially affected by unemployment benefit generosity and mandatory work for welfare benefits requirements.

Modern theory of the labour market, based on Mortensen and Pissarides provides that more generous unemployment benefits put upward pressure on wages the unemployed seek. If wages go up, holding worker productivity constant, the amount left to cover the cost of job creation by firms declines, leading to a decline in job creation.

Everything else equal under the labour macroeconomics workhorse search and matching model of the labour market, reducing the rewards of being unemployed exerts downward pressure on the equilibrium wage. This fall in asking wages increases the profits employers receive from filled jobs, leading to more vacancy creation. More vacancies imply a higher finding rate for workers, which leads to less unemployment.  The vacancy creation decision is based on comparing the cost of creating a job to the profits the firm expects to obtain from hiring the worker.

When unemployment benefits are less generous or more onerous work requirements are attached, some of the unemployed will become less choosey about the jobs they seek in the wages they will accept.  a number of people at the margin between working or not. An example is commuting distance  to jobs. A number of people turn down a job  because is just that little too far to commute. A small change in the cost of  accepting that job would have resulted in them moving from being unemployed to fully employed.

Unemployment is easy to explain in modern labour macroeconomics: it takes time for a job seeker to find a suitable job with a firm that wishes to hire him or her; it takes time for a firm to fill a vacancy. Search is required on both sides of the labour market  –  there are always would-be workers searching for jobs, and firms searching for workers to fill vacancies.

In a recession, a large number of jobs are destroyed at the same time. It takes time for these unemployed workers to be reallocated new jobs.  It takes time for firms to find where it is profitable to create new jobs and find workers suitable to fill these new jobs.

Recessions are reorganisations. Unemployed workers look for jobs, and firms open vacancies to maximize their profits. Matching  unemployed workers with  new firms firms is a time-consuming and costly process.