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January 18, 2010

HOW UNEMPLOYMENT BENEFITS AFFECT SELF EMPLOYMENT AND THE ECONOMY

HOW UNEMPLOYMENT BENEFITS AFFECT SELF EMPLOYMENT AND THE ECONOMY

The main purpose of this article is to argue that the current unemployment system may be stifling Americans from becoming self-employed. I will be turning to Canada for evidence in my theory. Please take time to check out the links throughout this article.

Before I begin my writing, I want to state that this is not writing in opposition to unemployment benefits, it is a writing expressing the consequences of how the system is currently being set up. Currently, the unemployment rate is at 10%, but the true number of unemployed, which includes those in part-time work seeking full-time jobs and those who are unemployed but not looking, is currently between 17 and 18%.

The costs of paying unemployment benefits are massive to the economy, but let us focus on those who receive the benefits. On a personal note, I spent four months on unemployment in 2009 so I can relate to the workings of the unemployment system.

Now, if you are on unemployment and you receive compensation for self-employment or part-time employment that is less than your unemployment benefits, the pay is deducted from your weekly unemployment check. So, if you are scheduled to get $350 per week and you make $100 for mowing yards, the unemployment office would pay you $250 (unless you illegally unreported it).

Many would consider this fair, but what folks don’t realize is that this encourages people to do LESS work. I considered starting a business while I was unemployed, but then I realized this rule. Why should I invest in something, only to have the income deducted from my weekly check? Many on the unemployed market are thinking this way and therefore, they are contributing less to the economy.

By being self-employed, people can eventually earn more than they would on unemployment (over time). In addition, they would likely be providing products and services at either at a higher quality or lower cost than their competitors, thus bringing value into the economy. Since self-employed people tend to perform with their strengths, they would also be keeping their skills up to date.

Under the current system, the incentive is to do less for the paycheck, provide less value, not to exercise and build skills, and ultimately, this takes a permanent toll on productivity of the labor force as a whole.

I’m not suggesting that we eliminate unemployment benefits and I’m also not suggesting that we allow full unemployment with self-employment income. I believe a balance has to be found. Maybe, we should continue to do it the same way, but offer a tax break on the self-employment income earned during unemployment. Making self-employment income tax free (while coinciding with unemployment benefits) and getting a nice check from the government (you would be taxed, but get it back) at the end of the year could definitely be a good motivator for entrepreneurial activity.

Think that we need to spend more per person on unemployment, look at Canada’s unemployment funding, which is completely privately funded.

While many may argue this would reduce government incomes and increase the deficit, I would argue the reverse. By lowering this barrier to employment, the number of self-employed individuals would increase, and those who are successful would resume paying taxes after their businesses were self-sustaining. Therefore, those who start their own businesses as a result of government incentives, would pay taxes and add to income in the future.

Finally, we must note that productivity in the corporate sectors of the economy is at an all-time high. Many economists are saying there may be a “jobless recovery” as these extremely productive establishments find ways to do more with less labor. Therefore, we need a larger, self-employed section of the economy to compete with corporations and businesses. Since capitalism thrives on competition, a healthy battle between both these sectors would allow for the creation of more jobs in both.

Self-employment started to grow in Spring 2009 and is still popular.

This concept is new to me, but I was totally turned off to starting my own business earlier this year when I realized that I would invest in the company, receive a trickle of income, and have that reduced from my unemployment check each week. Not to mention my investment in the company would require cash, and I would have to cover any losses. Therefore, I decided to remain unemployed for the time being and look for a traditional job.

Economic stimulus, or so it’s called, should be designed to stimulate economic activity, which leads to growth, not to simply pump money into the system. We need to develop innovative ways to get people working that use the free market system. Politicians underestimate the power of incentives in economics.

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