The Moral Hazard of Lousy Pay

First, a quick review of what economists call “moral hazard”.

In a nutshell, people are less likely to behave responsibly if someone else assumes part of their risk. So Wall Street banksters felt free to be reckless criminals because they knew they were “too big to fail”, and we taxpayers would have to bail them out. If you have full insurance with no deductible on your fancy new car, you may be less careful about getting it dinged. In both cases, someone else assumes the risk, making your behavior less responsible.

The same moral hazard applies to unemployment payments. Many people would not look for work with any enthusiasm if their unemployment payments were equal to their lost wages. That’s why unemployment bennies are always less than the lost pay.

Many would not look for work
if their unemployment payments
were equal to their lost wages.

Considerably less. Your actual benefit is a modest percentage of your lost pay. In California the maximum benefit is $454 per week, which equals $11.35 an hour, or about $23K per year. Not a huge amount.

Let us imagine that you lost a decent job, and your benefits for 26 weeks will be equivalent to the federal minimum wage of $7.25. To begin with, you will quickly realize that your benefits will not even pay the rent—in any city in the country, in fact. Someone must help support you, either with their wages, with free rent, or other help.

That kills the common Republican meme that the unemployed are lazy and unwilling to work because of overly generous benefits. Sleeping on someone’s basement couch and eating instant ramen is not exactly living in the lap of luxury, and you simply cannot survive without some such help, because neither unemployment benefits nor other welfare relief are generous, and do not continue indefinitely.

Your benefits will not even pay the rent.
That kills the common meme that says
the unemployed are unwilling to work
because of overly generous benefits.

But other factors sneak in when the job you lost pays poorly to begin with. Where your pay is already so low that you qualify for welfare assistance even while working. Places like Walmart and McDonald’s, for example.

If the lost job paid Walmart’s poverty wages, you will be less motivated to find another like it. Your unemployment bennies leave you poor, but so did your pay. Maybe the difference isn’t all that different. A single mother might relish the chance to be with her child for a while, since she can’t afford the expense of childcare while she’s not working. A person who had a sub-standard job working for an abusive employer is not going to be champing at the bit to get back to work.

Unemployment bennies leave you poor.
But full time work at Walmart also left you poor.

So, in a way, the right-wing haters who rave about the lazy unemployed might be sort-of right. The people who could only earn poverty wages that won’t even pay the rent may well find the idea of going back to work less than inspiring. But the term for that is still “moral hazard”. The unemployment bennies are too close to the lost wages, not because the benefits paid are too generous, but because the wages are so depressingly stingy that full time work still leaves one in poverty.

As it is with so many of the situations endured by the poor, the way to change such persons from discouraged unemployment benny receivers into taxpayers is very simple: Living Wage. No person who does decent full time work should be paid so poorly he can’t escape poverty. Many modern nations have living wage plans, yet we continue to argue about whether we should do anything at all about a minimum wage that is depressingly inadequate, and only one or two Congresspersons speak for a Living Wage law.

No person who does decent full time work
should be paid so poorly he can’t escape poverty.
Some speak righteously about the honor of work,
but if they actually believed it
they would also talk about an honorable wage.

There are two reasons we pursue this vapid discussion, I believe. The first is the unspoken self-contradictory belief that the poor are too lazy to work, and should therefore be paid inadequately. It’s the other side of the coin, on which it is written that minimum wage is enough to live on. In essence, the underpaid subsidize the rest of us with their sub-standard wages. It’s more a moral wrong than a moral hazard.

The second reason we still accept an inadequate minimum wage is this: Society devalues certain kinds of work, and such workers are seen as inferior. This brings to mind Albert Einstein, who wrote his theory of relativity while he was a common clerk in the Swiss patent office, and Vincent van Gogh, who lived alone and in deep poverty all his life, and whose paintings now sell for hundreds of millions.

There is much right-wing blather about how ennobling work is, but if such people actually believed what they say they would ardently support Living Wage. They don’t.


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2 CommentsLeave a comment

  1. I agree entirely with what you say. We have an idiot of a Prime Minister, so-called, trying to lead us down the American path, he admires the GOP with a reverence that it’s an embarrassment for all Australians to behold however we still have rules and laws in place that he is finding it hard to remove.

    We will remove him from office before he can succeed.

    The minimum wage in Australia now for an adult worker is $16;78 an hour giving a minimum weekly wage of $640.90.

    There will no doubt be some of your readers who will start screamng about the much higher tax rates, but are they really that high and onerous? The answer of course is no.

    On incomes below $18.200.00 pa no tax is payable incomes between $18201.00 and $37K is 19c in the dollar for every $ over 18200., and rises gradually after that hitting the higher income earners.

    Then of course nobody has to worry about that big problem of health Iinsurance. Our socialized system takes care of that too (Our PM wants to get rid of it naturally),

    These two links may be an eye opener for your readers as to some of the horrors of living in a socialized system.


  2. Reblogged this on Citizens, not serfs.


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