Incentives and unemployment

I don't usually quote Milton Friedman but he was certainly right when he said "there is no such thing as a purely economic issue".  Most economists presume that there is always a trade off between equality and efficiency and there is a large literature on the size and extent of this trade off.  Michael McDowell believes that "a dynamic liberal economy like ours demands flexibility and inequality in some respects to function." It was such inequality "which provides incentives".  This is a core belief of the right and it is seen as blindingly obvious common sense in that if you pay too much dole, the unemployed won't have the incentive to look for work. 

There was never much in the way of empirical evidence for this claim and the ESRI have have just released a report further confounding it.  They find that even though there have been large increases in Unemployment Benefit and Unemployment Assistance payments in recent years, "unemployment has remained low, and employment has continued to grow".  The study finds that "a combination of policies giving unemployed persons access to effective supports for re-employment, and requiring from them active engagement in training and job seeking has counterbalanced this, and helped to keep unemployment low". 

The left and the trade unions have long argued that it is 'unemployment traps' that constitute the real disincentives to work and the loss of medical cards, rent supplements and lone parents allowances are always likely to effect what is called the 'replacement ratio', i.e. the ratio of unemployment payments to direct take home pay.  The ESRI recognises that policies over the last few years have attempted to deal with this and it cites "special transitional arrangements for those moving into employment, the introduction of the 'doctor only' medical card, and the Rental Accommodation Scheme which provides for a less sharp withdrawal of housing subsidies".

John Baker and his colleagues from the Equality Studies Centre at UCD argue in their book Equality: From Theory to Action that Friedman's assertion is quite pertinent here as economists take an excessively narrow view of what constitutes disincentives, limiting the focus to cash payments and ignoring important institutional and cultural contexts.  People want to work for a whole variety of reasons and economists are, by their refusal to take a more holistic approach, basing their assumptions on a very limited view of human nature.