some unpleasant welfare arithmetic economics 260 fall 2012 © copyright 2012 by casey b. mulligan

Some Unpleasant Welfare Arithmetic

Economics 260

Fall 2012

Unemployment Insurance Misconceptions

• When participating in UI, unemployed people have about half of their earnings replaced, which still leaves plenty of incentive to get back to work

• The average weekly UI benefit of $300 barely exceeds the compensation from a full-time minimum wage job, and falls far short of the compensation from the job that was lost.

• To a good approximation, the macroeconomic effects of the ARRA, ACA, and other recent government expansions can be well understood without examining the incentives of people receiving the assistance

• --> a little arithmetic casts doubt on, if not refutes, this conventional wisdom

Table 1. Short-Term Financial Penalties for Accepting a New JobUI participants who are heads of household or spouse, offered $600 weekly on new jobWithout participation in any other subsidy program. Rates are also layoff subsidies from an employee's point of view.

EITC position Payroll PIT EITC UI FAC Combined 1.077 1.3482007, actual plateau or fully phased out 15% 18% 0 8% 36% 0 0 78% 72% 58%2009, actual plateau or fully phased out 15% 18% 0 8% 36% 3% 27% 108% 101% 80%2009, bigger plateau or fully phased out 15% 18% 0 8% 44% 13% 38% 136% 126% 101%

2007, actual phase-out range 15% 18% 21% 8% 36% 0 0 99% 92% 73%2009, actual phase-out range 15% 18% 21% 8% 36% 3% 27% 129% 120% 96%2009, bigger phase-out range 15% 18% 21% 8% 44% 13% 38% 157% 146% 116%

2007, actual phase-in range 15% 18% -34% 8% 36% 0 0 44% 41% 32%2009, actual phase-in range 15% 18% -34% 8% 36% 3% 27% 74% 69% 55%2009, bigger phase-in range 15% 18% -34% 8% 44% 13% 38% 102% 95% 75%

Notes: PTAF = compensation before taxes but after fringes, which include employer FICAPIT = personal inc. tax federal and state combined, including federal tax credits. State personal inc. tax assumed to contribute 3 percentage pointsEITC = Earned Income Tax CreditEmpl. Exp. = Full-time employment expense such as commutting cost, assumed to be $50 per weekFAC = Federal Additional CompensationWeekly COBRA expense assumed to be $251Tax and UI percentages apply to any weekly earnings level less than or equal to $900; the others refer to $600/week.If health insurance is also part of the offered job, Compensation/PTAF is 1.348, otherwise 1.077

Tax & UI Rules

Compensation/PTAF

Combined Penalty as % of Comp.

Empl. Exp.

foregone (after PIT):Taxes and ExpensesPenalties as Percentages of PTAF

COBRA subsidy

Tax & UI Rules

Compensation/PTAF

Empl. Exp.

COBRA subsidy

Tax & UI Rules

Compensation/PTAF

Empl. Exp.

COBRA subsidy

Tax & UI Rules

Compensation/PTAF

Empl. Exp.

COBRA subsidy

Table 2. Helping the Poor and Vulnerable with a Bigger Stimulus

Increase UI's exclusion from personal income taxIncrease Federal Additional Compensation from $25 to $75Increase COBRA subsidy rate from 65% to 90%Increase SNAP maximum benefit by an additional 20 percentExclude UI from SNAP and Medicaid income tests

Tax & UI Rules

Compensation/PTAF

Empl. Exp.

COBRA subsidy

Household Earnings for the Calendar Year

Increasin

g EITC

Maximum EITC

Decreasing EITC

End of Increasing Credit

Begin Phaseout

No EITC

The Earned Income Tax Creditmarried with one child, tax year 2011

$9,100 $21,770 $41,132$0

Table 4. 2009 Job-Acceptance Penalty Rates that would Follow a Layoffmillions of non-elderly household heads and spouses employed full-time in 2007 with weekly earnings >=$300Three different tax & subsidy rules

tax & subs. rules:Penalty Rate number cum. number cum. cum. vs 2007 number cum. cum. vs 200900-69 53.3 94.9 24.9 94.9 0.0 7.1 94.9 0.070-79 25.4 41.6 34.3 70.0 28.4 21.5 87.8 17.880-89 13.2 16.2 24.1 35.7 19.6 16.7 66.3 30.690-99 0.6 3.0 8.0 11.7 8.7 29.6 49.6 37.9100+ 2.3 2.3 3.6 3.6 1.3 20.0 20.0 16.3

Note: Cum. refers to the cumulative number of people with that tax rate or higher.

2007, actual 2009, actual 2009, bigger stimulus

Accepting a job paying as much as the prior job2007, actual 2009, actual 2009, bigger stimulus

Accepting a job paying 17 percent less than prior job

Table 5. 2009 Job-Acceptance Penalty Rates among Persons Actually Laid Offmillions of non-elderly household heads and spousesThree different tax & subsidy rules

tax & subs rules:Penalty Rate number cum. number cum. cum. vs 2007 number cum. cum. vs 200900-69 8.5 23.3 4.7 23.3 0.0 1.5 23.3 0.070-79 7.4 14.7 6.5 18.5 3.8 3.8 21.7 3.280-89 5.5 7.3 6.7 12.1 4.8 3.4 18.0 5.990-99 0.4 1.8 3.2 5.3 3.6 6.6 14.6 9.3100+ 1.4 1.4 2.2 2.2 0.7 8.0 8.0 5.9

Note: Penalties rates are percentages of total compensation, including fringes. Table entries are millions of persons.Addendum: 4.6 million = 2007-2010 aggregate increase in number of unemployed non-elderly household heads and spouses.

Accepting a job paying as much as the prior job

Accepting a job paying 17 percent less than prior job2007, actual 2009, actual 2009, bigger stimulus

0 20 40 60 80 100 120

Weekly cost of care per child aged 0-4

Figure 1. Number with Job Acceptance Penalty of at least 100 percentamong household heads and spouses receiving UI. Job offer pays same as previous.

bigger stimulus

actual

2007 tax & benefit rules

0.7 million

1.3 million

Table 6. Fraction with Job Acceptance Penalty at Least 100%, by Demographic Characteristicsamong non-elderly household heads and spouses receiving UI in 2009

2007 2009 bigger stimulusAll 5% 8% 31%Weekly earnings when working

250-349 19% 43% 89%350-449 11% 4% 98%450-549 10% 10% 50%650+ 1% 1% 3%

Schoolingless than HSG 9% 17% 50%HS grad 6% 9% 38%more than HS 4% 6% 23%

Age in 200818-34 9% 12% 36%35-49 5% 8% 30%50-64 3% 4% 26%

GenderMale 4% 7% 25%Female 7% 10% 37%

Marital StatusNo spouse present 13% 14% 33%Spouse present 0% 4% 29%

Children0 5% 5% 26%1 5% 11% 40%2+ 6% 12% 34%

Health Ins. on prior jobNo 9% 14% 38%Yes 0% 0% 19%

RaceNon-white 8% 11% 35%White 5% 8% 30%

tax & subsidy rules

Table 7. 2009 Layoff Subsidy Ratesmillions of non-elderly household heads and spouses employed full-time in 2007 with weekly earnings >=$300Three different tax & subsidy rules

Notes: Cum. refers to the cumulative number of people with that subsidy rate or higher.All three tax and subsidy scenarios assume the actual duration of UI benefits (that is, up to 99 weeks).

350 400 450 500 550 600 650 700 750

Job offer's weekly pay (PTAF)

Figure 1. The Financial Reward for Job Acceptanceas a function of family composition

(Prior and offer job provide health insurance. Prior job paid $600/week)

Married, 0 children

Married, 1 child

Married, 2 children

Unmarried, 0 children

Unmarried, 1 child

350 400 450 500 550 600 650 700 750

Job offer's weekly pay (PTAF)

Figure 2. The Financial Reward for Job Acceptanceas a function of family composition

(Prior and offer job do not provide health insurance. Prior job paid $600/week)

Married, 0 children

Married, 1 child

Married, 2 children

Unmarried, 1 child

Means-tests in the ACA

• Health insurance price discrimination on the basis of income– equivalently, free health insurance plus a progressive

addition to the income tax

• Three sources of health insurance– Medicaid: eligible if below 1.33 or 1.8 FPL– Employer plans: maintain tax exclusion, subsidies

for small employers and low-wage employers– Individual plans: participants pay through means-

tested premiums and means-tested out-of-pocket cost-sharing

1 2 3 4 5 6

AGI as ratio Federal Poverty Line

Out-of-Pocket Health Costs as a Function of AGI

premium

cost contribution

combined

1 2 3 4 5 6

AGI as ratio Federal Poverty Line

Marginal Tax Rates as a Function of AGI

MTR on $1 adjustment

MTR on 1/6 adjustment

MTR on 1/3 adjustment

Unpleasant

• 100 percent tax rates– “caus[e] needless waste and demoralization.”– “This application of the means test is bad economics as well

as bad sociology.”– “It is almost as if our present programs of public assistance

had been consciously contrived to perpetuate the conditions they are supposed to alleviate.”

• one thing that Milton Friedman (Chicago) and James Tobin (Yale) agreed on.

some unpleasant welfare arithmetic economics 260 fall 2012 © copyright 2012 by casey b. mulligan

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