Scarcity: The use and abuse of psychology to reduce unemployment

The idea that psychology (rather than shortages of jobs or skills) plays a role in unemployment is controversial. Yet employment service providers report that motivation makes a difference. A decade ago, an Australian Government study argued that the attitudes of unemployed people influenced their job prospects. But it left many questions unanswered: what lay behind those attitudes? Where they permanent or a fleeting response to current circumstances? A new book by American economist and psychologist team Mullainathan and Shafir gives us new insights into how people respond to poverty. It reveals how ‘scarcity’ shapes people’s lives and behaviour. This has implications for the way governments treat unemployed people.

Along with employment opportunities, skills and financial incentives, the motivation of unemployed people to search for work has an impact on their employment prospects. This can be viewed in three different ways.

The ‘homo economicus’ view holds that this is due to financial incentives. If people don’t increase their incomes much by working then they might ‘rationally’ decide to remain on income support. Financial incentives are always important, but don’t seem to explain much of our 6% unemployment rate. Most unemployed people are single. A single unemployed adult would more than double their disposable income by taking a full time job at the minimum wage. The rate of unemployment in Denmark is similar yet unemployment insurance payments there are typically equal to 90% of a modest fulltime wage.

incentives

A second view is that people’s attitudes – shaped by their family and social environment – hold them back from improving their lives. This is the so-called ‘culture of poverty’ theory. Advocates of this view such as Laurence Mead , argue that labour market reform and better financial incentives won’t do much to reduce unemployment. Paternalistic polices (such as Australia’s ‘Work for the Dole’) are the answer. While obligations to search for jobs do reduce unemployment, evidence is lacking that most social security recipients suffer from the kind of social ‘dysfunction’ hypothesised by Mead.

A third view, based on new research informed by behavioral economics, holds that the experience of poverty and unemployment itself holds people back. In addition to a lack of access to jobs, skills and opportunities, people living in poverty experience scarcity, and scarcity messes with the mind.

(1) It’s about attitude

bad attitude

The view that people’s attitudes towards unemployment affect their job prospects was presented in a study commissioned by the Howard Government in 2001. This ‘attitudinal segmentation’  study commissioned by the Australian Employment Department classified unemployed people according to their attitudes towards unemployment as (among other categories) ‘drivers’, ‘cruisers’ or ‘withdrawn’:

“In 2001 the Department of Employment and Workplace Relations (DEWR) commissioned a study to develop a model of job seeker attitudinal segmentation, in which job seekers were grouped based on their attitudes towards finding work. The model was developed in several stages. In-depth interviews with a range of job seekers were first undertaken to identify what underlies job seekers’ attitudes and drives their behaviour. This research resulted in the development of a framework of eight job seeker segments.

Job seekers were asked to agree or disagree with each of the attitudinal statements using a 10-point scale for their responses. Extensive statistical analysis of responses to the attitudinal statements was undertaken to develop an algorithm to allocate job seekers to segments, as well as to quantify the segments.” p3

The research used the same tools applied by market researchers to segment their potential customer base. The results of this research are summarised in the figure below:

attitudinal segmentsHow might such research be used? The Department argued that:

“The characteristics associated with each of the segments can help identify the types of
assistance required to most effectively generate the desired behaviours of active job search, economic participation and reduction of income support reliance. The survey also identified that more than half (57%) of job seekers were in the less motivated segments. This indicates a strong focus for assistance on increasing the “benefits” of job search and paid employment and decreasing the “costs” of moving from unemployed to employed.” p20

There’s nothing novel about this prescription. It comes from the ‘homo-economicus’ textbook with its emphasis on work incentives. It’s a short step from here to punitive ‘solutions’. In  a presentation in 2003 which referred to the attitudinal segmentation research as evidence for welfare ‘dependency’, Peter Saunders, then with the Centre for Independent Studies (CIS), cited Mead in support of time limits on unemployment payments:

“As Lawrence Mead puts it: “Disadvantaged people without jobs find no end to reasons why working is impossible for them… They avoid personal responsibility and blame circumstances beyond their control…a mentality is at work that refuses to believe that opportunity exists, even when it does” (Lawrence Mead, ‘The New Politics of Poverty’ Basic Books, New York, 1992, pp.143-5)” p13

The political reaction to this research was predictable. The then Employment Minister turned his attention on the 16% of job-seekers identified as ‘cruisers’, argued publicly that ‘cruising’ was the reason many failed to show up at compulsory interviews, and promised to ‘get tough’.

dole bludger

Missing from the ideological reactions to this research was any serious attempt to work out where these ‘attitudinal’ responses to unemployment came from. Were they due to a ‘mentality’ among poor people as Mead suggests, were people reacting to financial incentives (the payment of benefits), or was something else going on? Until we work his out, classifying unemployed people according to their ‘attitudes’ will only reinforce stereotypes.

There were plans to use the attitudinal ‘segments’ identified in surveys such as this one to inform the provision of employment services, but they came to little. The idea that the kind of assistance (or punishment) unemployed people receive should depend on their responses to a psychological survey carried serious risks for unemployed people and governments. ‘Orwellian’ is a word that springs to mind.

Some providers do use their own assessments of people’s psychological reactions to unemployment to inform service provision. One approach used in Australia takes account of the impact of fear and self esteem on motivation among job-seekers. Providers using this model place less immediate emphasis on active job search where they identify these factors as barriers to employment.

Other providers use their own assessment of people’s motivation as a signal of whether it it is worth investing in employment assistance. Since motivation is not measured by the assessment tool used by Centrelink to determine the financial rewards for providers if they find someone a job (and it would probably not be possible to measure it accurately), there are financial benefits for providers who can identify which of their most ‘disadvantaged’ job-seekers are more ‘motivated’ (and therefore more likely to find a job with a bit more support). The problem with this strategy is that people whose motivation is impaired by severe labour market disadvantage will be ‘parked’, that is denied help beyond the minimum contractual requirements. The most effective providers don’t ‘park’ people who seem to lack motivation right now. They make an effort to find out why, and work out a way to engage them by holding out the prospect of employment.

(2) It’s about how we respond to our circumstances

stress

An alternative view is that poor people’s attitudes and responses to their circumstances are shaped by their experiences at the time rather than a fixed outlook on life (e.g. ‘ambitious’ or ‘lazy’), or economic incentives.

A new body of research in psychology and behavioural economics offers insights into the way people adapt to poverty. To my mind (as someone who has worked with unemployed people), these insights are more grounded in reality than either ‘homo-economicus’ or the view that unemployment and poverty are signs of deeper social dysfunction. This is not to say that economic incentives and social background are unimportant: in some cases they make all the difference. It’s just that they don’t provide a firm evidence base for policies to reduce poverty or unemployment in the majority of cases.

A new book by American economist and psychologist team Mullainathan and Shafir neatly summarises a raft of recent research on how people respond to ‘scarcity’ . As the authors point out, it’s not just a scarcity of money that affects behaviour. Scarcity of time can produce the same results.

“Scarcity captures the mind. When we experience scarcity of any kind we become absorbed by it. …For the hungry, that need is food. For the busy it might be a project that needs to be finalised. For the cash strapped it might be this months’s rent payment. ….Scarcity changes how we think.”

The authors note that this has a positive side: people experiencing poverty are often better at managing their weekly budget because their minds are focussed on financial survival. But there’s a downside:

“Because we are preoccupied by scarcity, we have less mind to give to the rest of life. We can directly measure mental capacity or, as we call it, ‘bandwidth’. We can measure fluid intelligence (a key resource that affects how we process information and make decisions). We can measure executive control, a key resource that affects how impulsively we behave. And we find that scarcity reduces all these components of bandwidth. Being poor reduces a person’s cognitive capacity more than going without one full night without sleep. It’s not that the poor have less bandwidth as individuals. Rather the experience of poverty reduces anyone’s bandwidth.”

The authors offer a few practical examples. Firefighters in the US are more likely to die from motor vehicle accidents than other people. In their rush to respond to a call, with their minds fully occupied with dozens of urgent tasks, they often forget small things like buckling their seat belts. Similarly, the greatest risk from mobile phone use while driving does not come from holding the phone: it’s the loss of attention to the road while we speak and listen.The authors call this ‘tunnelling’:

“The narrowing of the visual field in which objects inside the tunnel come into sharper focus while rendering us blind to everything peripheral, outside the tunnel.”

tunelling

They illustrate this with psychological tests. Before undergoing a standard test of cognitive ability, people on different income levels were asked to imagine how they would deal with a situation where their car required a $3,000 in mechanical repairs. To those on higher incomes, this wasn’t too much of a distraction. It didn’t have much affect on their scores on the test. For those on low incomes it was too close to the bone. Their scores plummeted. The distraction of working through a financial problem had a similar impact on their test scores as the loss of a night of sleep.

At a practical level, ‘tunnelling’ means that people who are short of money are more likely to focus on their immediate needs than future plans. People in poverty are often too busy juggling their finances, and responding to the minor and major crises related to poverty (the threat of electricity disconnection or eviction, finding the money for a school excursion, or chronic ill health) to raise their horizons beyond short term survival.

Once again, we should careful not to fall back on stereotypes. Do all people in poverty fall into this trap of short-term thinking? Clearly not. But the psychological researched cited by Mullainathan and Shafir suggests that it is harder for people whose minds are focussed on immediate survival and crisis management to make plans to improve their circumstances over the longer term, including through effective job search.

How many unemployed people face these circumstances is an open question, but with Newstart Allowance set at $37 a day financial worries are rarely far from people’s minds. A recent Senate Inquiry into proposed changes to benefit waiting periods revealed that 70% of people who apply for Newstart Allowance seek a waiver of the standard one week waiting period on financial hardship grounds. Most enter unemployment with few resources behind them. For example, most people on  Newstart Allowance rent their housing and about half don’t own a car.

Policy applications

The insights from ‘scarcity research’ have implications for the way we provide services for unemployed people, for example, the treatment of people when they first apply for unemployment payments.

Much of the recent debate over solutions to unemployment has focussed on how new claims for unemployment payments should be treated. This is often based on the simplistic view that ‘welfare creates its own dependency’, so that once people enter the system they will become stuck there.

In the 2014 Federal Budget, the government proposed that young unemployed people be made to wait for 6 months for payment in the hope that this would spur them to find a job. Like proposals to put a time limit on benefits, this is based on a ‘homo economicus’ view of unemployment: change incentives and people will respond. Yet few labour market economists think this is a good idea. It ignores the demand side the labour market (a lack of jobs) and leaves people exposed to poverty. This is the ‘starve them into submission’ approach to unemployment. The 2014 budget proposal (and the 1 month wait proposed in 2015 after the 6 month wait was rejected by the Senate) tried to reduce the risk of impoverishment by exempting people assessed as having a higher risk of long term unemployment, but such assessments are far from 100% accurate. If there aren’t jobs available where people live that are suited to their skill level, then even less ‘disadvantaged’ unemployed people will remain out of work. This harsh approach shifts the financial risk of unemployment from government to unemployed people.

Paternalists argue for a different approach: impose stringent requirements (such as intensive job search) backed by close supervision of unemployed people. The idea is that those who can easily find employment will leave benefits more quickly, while those facing greater difficulty can be identified and offered more help. The advantage of this approach over long waiting periods is that on the face of it income support is not denied to people and it at least makes a serious attempt to treat these two groups differently. And there is evidence to suggest that supervised job search helps reduce unemployment by keeping people engaged with the job market and improving the effectiveness of their efforts to find work.

It’s not so clear when and how employment requirements should be applied. One view holds that job search and other requirements (such as working for the dole) should be imposed intensively as soon as people claim benefits, in the hope that people with good job prospects don’t persist with their claim. This idea is called ‘diversion’.

go away

When this strategy was applied to sole parents claiming Temporary Assistance for Needy Families (TANF) benefits in the United States as part of a welfare ‘reform’ in the mid 1990s, it did turn many people away from income support, but not just those who didn’t need it. Many financially disadvantaged people who had difficulty dealing with public bureaucracies or meeting work requirements (for example due to a disability) were ‘turned away’ from benefits and experienced severe hardship. A study by Acs found that successful claims for TANF declined sharply yet the financial need for income support did not. Blank found that a decade after the US welfare ‘reform’, one in five low-income mothers at risk of poverty received neither TANF nor wages for a year at a time. Most of this group had virtually no source of income and they and their children were impoverished.

In 2005, the Australian Government trialled an experiment called ‘rapid connect’ in which unemployed people claiming benefits were referred more quickly to their first Job Network (employment service) interview. Instead of being given 14 days to register with the Job Network, they were required to do so within two days of their first appointment at Centrelink. When this was evaluated it was found to increase the probability of employment within the first 14 days, though from a low base – from 1% of applicants to 4%. Unfortunately the evaluation did not examine what happened to people who did not pursue a claim, including the extent to which they reapplied later. ‘Rapid connect’ had a downside. Unemployed people had too little time and too little information to choose the Job Network provider best suited to their needs. The majority did not make a choice and were assigned to a service by Centrelink, or simply opted for the nearest provider. This meant that people were often poorly matched with providers. If they didn’t find employment quickly, this was likely to reduce their future job prospects.

It also meant that from the outset, their relationship with employment services was passive. People were following requirements rather than taking the most effective action to find a job.

‘Scarcity’ theorists would advocate a different approach. Rather than force people to undertake intensive activities (including making their first contact with unfamiliar services) in a rush when their minds are focussed on how they will pay their rent and feed themselves, assure them that financial support will be provided if they register with an employment service and give them the time and information they need to choose one.

The first interview with an employment service provider would also be structured differently. Instead of gathering information in a mechanical way (following screen prompts) to populate a standard list of activity requirements and pushing people to sign immediately, it would better to start with an open ended discussion of how they see their career goals and job prospects, so that the focus turns to their own plans to secure employment and how the provider can help. This shifts the responsibility and initiative to where it should lie, with the job-seeker. Benefit requirements should be explained, but that could come at the end of the interview, once a positive relationship has been established with the consultant. It would help if providers were paid to spend more than half an hour with people in the first interview.

Scarcity theory also offers insights into the reasons people miss appointments with Centrelink and employment services, and what might be done about this. For at least a decade, around one third of these interviews were missed. There are often good reasons for this, including that the person has found employment or that they are ill. Yet a small minority of job-seekers account for a high proportion  of missed appointments.The main response of successive governments to this problem has been to tighten penalties for non attendance. Some of these changes were sensible – including the idea of suspending payments until the person attends an appointment, and then restoring them. Most people who still need income support quickly contact Centrelink and the appointment can be re-scheduled.

late

Less attention has been paid to the reasons people miss appointments. The Employment Department surveys unemployed people from time to time about their experience of employment services. Why not ask whether they missed appointments, why this happened, and what might be done to make it easier to meet their requirements? Innovations such as reminders by text message have made a difference, but more that could be done, especially for people who are likely to face the greatest difficulty such as those with limited literacy or poor mental health. Sanctions could then be limited to the minority of people who deliberately fail to comply.

When unemployed people are ‘tunnelling’ in response their immediate problems, we need to find better ways to bring their attention back to requirements such as employment service appointments. Simply threatening to cut payments may be counterproductive: some people will avoid contact out of fear. People sometimes avoid opening letters from Centrelink altogether for this reason.

Finally, there is something governments can do to reduce financial scarcity for people who are unemployed: improve the Newstart Allowance. Making people live and search for work on $37 a day doesn’t improve people’s job prospects; it degrades them.

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