Is refraining from employment a logical decision amidst societal financial circumstances?
Rewritten Article:
In the real world we live in, worklessness is a grave issue that has become increasingly apparent since the pandemic, with lockdowns intensifying its impacts.
Consider Grimsby, for example, where more than half the working-age population now relies on some form of welfare. Across the UK, spending on disability benefits for anxiety and depression has doubled since the pandemic, with the government shelling out £3.4bn last year on personal independence payments for those claiming to be affected by these conditions.
But what if this worklessness is simply a rational response to economic circumstances, a calculated choice?
The predominant economic theories today revolve around the so-called "dynamic stochastic general equilibrium," or DSGE, models. Central banks, institutions like the IMF, and academia all have their versions of these models.
These DSGE models, with their hair-raising math, play a crucial role in policy making. They help predict economic behavior based on the trade-off individuals face between working and leisure. Work provides the income required for consumption, while leisure time is also valued.
So, what happens when productivity takes a hit? According to DSGE, individuals might shift their focus to leisure temporarily, as they wait for productivity to recover and earnings to increase.
The pandemic undeniably created a negative shock to growth and productivity, which likely explains the surge in worklessness. However, the theory assumes that once growth resumes, individuals will rationally choose to work more.
Regrettably, life isn't always that straightforward. Modern updates to the original DSGE model shed light on several reasons why worklessness persists beyond temporary shocks.
For instance, the seminal 1980s paper by Kydland and Prescott assumes a smoothly functioning free market with minimal barriers to individuals exercising their rational choices. However, life is not so ideal, with path dependence and numerous other imperfections impeding the workings of the free market.
Path dependence, in essence, means that choices made at one point can constrain future options, making it hard to switch paths if necessary. So, Opting for benefits during a downturn could limit the possibility of returning to the workforce once growth improves.
In other words, it's crucial to alter the trade-off between work and leisure right now, not just in some hypothetical future. Politicians like Keir Starmer may tinker with the extent of benefit cuts, but a more fundamental shift is needed.
Paul Ormerod is an economist, Honorary Professor at the Alliance Business School, University of Manchester, and author of Against the Grain: Insights of an Economic Contrarian, published by the IEA in collaboration with City AM.
- In light of the economic theories, such as the DSGE models, an individual's decision to focus on leisure during a period of decreased productivity might be a rational response to financial circumstances, touching upon aspects of both work and finance.
- However, current economic conditions, influenced by elements outside the idealized free market, like path dependence, can make it challenging for individuals to transition back to work, even as the economy recovers, linking the issue of worklessness to both politics and general news.
