Along with the immense financial and emotional toll job losses take on individuals, families and communities, there is a significant economic impact on state government and ultimately taxpayers.
Several economists have studied the cost of unemployment on government. The most recent being a 2008 study by Lawrence Summers, the newly appointed Director of the White House National Economic Council.
Looking at the available data, we can estimate that every Minnesota job that is lost will cost our state, and taxpayers, $10,000. To put that in larger context, the 10,500 jobs we lost last month created a $105 million hole in our budget. And if State Economist Tom Stinson is correct in his projections of 77,000 more job losses in 2009, Minnesota will be dealt another $1 billion blow.
Unemployment is particularly damaging to our economy because the state budget is hit on both the revenue and spending side. Less revenue comes in the door due to the loss of income and sales taxes while more is going out for unemployment benefits and other government assistance programs for the unemployed. The $10,000 figure is a conservative estimate because it doesn’t include several indirect costs such as more crime, higher incarceration rates and increases in various health care related expenditures.
Ultimately, we have a jobs problem in Minnesota and it is our jobs problem that is causing our budget deficit problem. That is why a solution for our state budget deficit problem that doesn’t address our jobs problem is not a solution that benefits Minnesota taxpayers. Job protection and creation must color every decision we make as we work together to responsibly address our budget deficit. By making jobs a top priority, we can put Minnesota back on the right track to economic prosperity.
Lawrence H. Summers, “Unemployment.” The Concise Encyclopedia of Economics. 2008. Library of Economics and Liberty. 17 December 2008.
The Summers study focuses on the cost both on the state and federal level, but we can roughly extrapolate the cost on the state level.
“For an individual who work for $15.00 an hour….taxpayers as a group paid $8.25 in unemployment benefits for every hour the person was unemployed, and got back in taxes only $1.49 on this benefit. Moreover, they gave up $3.85 in lost tax and Social Security revenue that this person would have paid per hour employed at a $15.00 wage. Net loss to other taxpayers: $10.61 ($8.25 – $1.49 + $3.85) per hour. Multiply this by millions of people collecting unemployment, each missing hundreds of hours of work, and you get a cost to taxpayers in the billions.”
At the state level the maximum hourly cost is $6.76 an hour, which would overstate the tax impact to the state. At $6.76 per hour, the cost for a year would be $13,500.
This is from 2001 data from Missouri. It assesses the cost for Missouri at $5,700 per job. I want to check if we are on the level to say that once you factor in inflation, Minnesota wages and how our state delivers unemployment the figure of $5,700 per job would be closer to $10,000. (MISSOURI’S COST OF UNEMPLOYMENT,PAVLINA R. TCHERNEVA JUNE 4, 2005)
“…. the cost to the state per unemployed individual is $5,764, which includes the direct cost of paying unemployment insurance and the opportunity cost of foregoing $2,935 in income and sales tax revenue.”
The study also states that this is a conservative estimate because:
“Also note that when we calculate the cost to the state we do not account the foregone revenue from loss of collection of local and other taxes that may be imposed in different cities, counties and districts across the state. However, since the loss of state revenue is subsumed in our overall COU-MO measure, these costs are already implicitly accounted for. What we do not account for is the increased expenditures of Medicaid and TANF. Neither are we able to measure the “untold costs” in terms of higher crime, incarceration and divorce rates, as well as health problems and other factors, which we alluded to in the section about indirect costs.”