I have explained in previous posts how public moneys have recently been used to help the unemployed, the poor and the financially distressed endure the recession, but at the same time have dramatically eroded incentives for people to maintain their own living standards by seeking, accepting and retaining jobs, as well as incentives for employers to create jobs that are attractive to workers.
.. Paul Krugman ..: “What’s limiting employment now is lack of demand for the things workers produce. Their incentives to seek work are, for now, irrelevant.”
One way I tested, and rejected, the Keynesian assumption was to compare work-incentive changes and work-hours changes between 2007 and 2010 across 10 demographic groups differentiated according to their skill (five categories) and marital status (two categories). In the Keynesian view, the two changes would be correlated only by coincidence.
The group-specific incentive changes are measured .. on the horizontal axis in the chart below as percentage changes in the share of what people keep from what they earn, net of taxes paid and subsidies forgone ..
The vertical axis of the chart measures the percentage change in hours worked per person, most of which is due to increased unemployment rates ..
The fact that marginal tax rates rose so differently for various groups means not only that redistributive public policy depressed the labor market but has also sharply, and arbitrarily, altered the composition of the work force in the direction of people who are married and more skilled.