To insure or not to insure America’s unemployed

The old adage goes, give a man a fish and he will eat for the day, but teach a man how to fish and he’ll eat forever. But what if a man is getting fish for free every day? Then what is his motivation to learn how to fish and provide for himself?

This analogy personifies a major theme in the argument against high rates of unemployment benefits: If people are given high rates of unemployment benefits, they will not have as much incentive to look for work.

As a result of people being motivated to not look for work, unemployment grows, the governments’ funds are strained and overall productivity sinks.

While this argument is structurally sound, it ignores the possibility of feeding the man, but only on the condition that he learns how to fish.

The government should focus spending on active labor market policies (ALMPs) and use unemployment benefits as a way to incentivize the unemployed to utilize ALMPs. An excellent case study for this argument is Denmark and its famed flexicurity system.

Denmark's labor policies are worth studying. (AP Photo)

The system allows companies the freedom to easily fire their employees, but ensures jobless citizens one of the highest transfer payment rates in the world — it averages 64 percent of an unemployed citizen’s former salary, according to the Organisation for Economic Co-operation and Development (OECD). The model clearly works for Denmark, as it currently has around four percent unemployment and has a top-15 GDP per capita, according to the OECD.

Thanks to this success, the model has been trumpeted by politicians and reporters in both Europe and America since the mid-’90s. However, Denmark didn’t find success until it added ALMPs to the flexicurity equation in the mid-’90s. Before that, Denmark had over a 10 percent unemployment rate and was considered a country in crisis, according to OECD numbers. According to Danish scholars Torben Anderson and Michael Svarer, Denmark’s “social safety net served to protect incomes, but not to bring unemployed back into employment.”

To motivate people to get back to work, a series of labor reforms introduced ALMPs and conditions for collecting unemployment benefits in the mid-’90s.

With the reforms, the unemployed were forced to meet with job counselors and take training courses or they would lose their unemployment benefits. As a result, people were forced to look for employment and train themselves to become employable.

According to the OECD, after the implementation of these reforms, unemployment dropped from a high of 13 percent in 1994 to 4.5 percent in 1999. According to Andersen and Svarer, ALMPs help to reduce unemployment in a two-fold way by using the “post-program effect” and “threat effect.” The training and educational aspects of ALMPs help to prepare people for jobs. Post-program effect, however, is the fact that unemployment benefits are cutoff if workers don’t start training and actively looking for a job helps to push the unemployed back into the labor market.

Obviously the cultures of Denmark and the United States are extremely different, and a system like Denmark’s flexicurity would be difficult to transplant into America. However, examining the Danish social insurance system should spur the creativity of America’s labor officials to perhaps put greater emphasis on ALMPs to get our unemployed back in the work force.

Currently, Denmark spends 2.26 percent of its GDP on ALMPs and America spends .57 percent. Denmark’s unemployment is 4.4 percent and America’s is 7.3 percent, according to OECD. While macroeconomic and international factors have to also be accounted for, these numbers do show that tapping into the “threat effect” and “post-program effect” via ALMPs can get people back to work.  There are different methods of providing unemployment benefits, just as there are different methods of fishing, and success can vary depending on which method is used.