Is Refusing to Hire the Unemployed a Waste of Human Resources?

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SQUANDERED HUMAN CAPITAL/Narcissus by Caravaggio (Wikipedia)

The feeling that there is something grossly unfair about openly or surreptitiously refusing to hire the unemployed is widespread, as a visceral and/or cerebral response. Addressing and motivated by that sentiment, the American Jobs Act, strongly endorsed by President Obama,  proposes that discrimination against the unemployed merely for being unemployed shall be prohibited and punishable.

However, the AJA’s most clearly and explicitly articulated rationale for opposing the practice of refusing to hire the unemployed is not that such refusals are discriminatory, but, rather, that the practice would “burden”  U.S. commerce if allowed to stand. Although categorized within the AJA as discriminatory, the refusal to hire the unemployed is primarily decried in the AJA for its economic, rather than moral consequences—specifically in terms of five ways in which it can burden the economy.  These five listed ways (Section 372) are

“(1) undermining economic stability and growth

(2) squandering human capital  essential to the Nation’s economic vibrancy and growth

(3) increasing demands for Federal and State unemployment insurance benefits, reducing trust fund assets, and   leading to higher payroll taxes for employers, cuts in benefits for jobless workers, or both;

(4) imposing additional burdens on publicly funded health and welfare programs; and

(5) depressing income, property, and other tax revenues that the Federal Government, States, and localities rely on to support operations and institutions essential to commerce”

In Part I of this analysis, the first burden—“undermining  economic stability and growth”—was examined as a claim and premise of one argument against refusing the unemployed and was found to be less than compelling. Now, the remaining four burden-arguments need to be examined to determine to what degree they are cogent and whether indeed the practice described as discriminatory is bad economic practice as well as morally bad.

Forms of Squandering Human Capital

In “Sec/ 372: Findings and Purpose” of the AJA, the second burden is identified as “squandering human capital essential to the Nation’s economic vibrancy and growth”. To determine how accurate this claim is and how cogent the inference from it to the conclusion that refusal to hire the unemployed should accordingly be prohibited, it is imperative to clearly understand what “squandering” means in this context. In general, of course, it means “to spend or use wastefully or extravagantly”.  Adopting this interpretation as our working definition, the question becomes how does refusing to hire the unemployed squander vital human capital?

Obviously, for the claim to stick, that human capital would have to be spent, utilized or consumed wastefully or extravagantly. Examples of how human resources/capital can be wasted include the following:

  • Applying human capital in ways that have unacceptably huge opportunity costs, e.g., having the nation’s licensed physicians assigned the full-time task of filling in forms that document medical procedures performed by unlicensed interns
  • Failing to utilize human capital at all, e.g., providing immigrant physicians licensed in other countries no opportunity to work at all until they acquire full citizenship, rather than merely permanent residency
  • Utilizing human capital in extremely inefficient or unproductive ways, e.g., requiring licensed physicians to commute to treat a prescribed number of patients residing outside their medical practice community, on a model analogous to circuit court judges who itinerantly roam over various geographical districts (perhaps to ensure that the physicians’ services are not overly concentrated in one geographical area or socio-economic stratum).
  • Artificially inflating the government-administered compensation package for human capital,e.g., by legislating outrageous pension packages for public hospital licensed physicians.

Is Refusal to Hire the Unemployed Really Squandering?

With these examples in mind, ask yourself whether refusing to hire the unemployed will either entail or possibly contribute to squandering their talents and experience in any of these four ways, and whether there are other ways in which those talents and experience might be squandered as a result of exclusion from hiring.

Clearly, the most obvious way in which the talents and experience of the refused unemployed would be squandered by refusal is through the second-listed way—failure to utilize them at all, through continuing unemployment assured by a refusal policy. However, this, from one perspective, is a short-sighted analysis, because it overlooks the fact that while a given unemployed worker’s human capital is being unutilized, another currently employed worker’s skills are being transferred to the job denied the former—thereby creating a vacancy to be filled by yet another currently employed worker (on the assumption that, in the extreme and most pervasive form of this kind of discrimination, only those currently employed will ever be hired, through a kind of endless recruitment game of musical chairs that leaves only the unemployed (still) standing when the music stops.

The shortcoming of the short-sighted analysis is that it overlooks the distinction between micro-economic under-utilization and macro-economic under-utilization: Even though the individual refused unemployed worker, at the micro-economic level and as human capital, is not utilized, the economy as a whole is utilizing precisely the amount of human capital required by the job market. That’s the cold macro-economic fact that belies the painful micro-economic reality.

A second shortcoming in the “unutilized human capital” argument is that it overlooks the fact that being employed is not synonymous with being hired. Although determining the exact proportion of workers who are self-employed in any given profession or job category is a matter of statistical analysis, it is a priori clear that some of the unemployed who are refused may be forced or inspired to resort to self-employment. For those who succeed, “squandering” of their talents and human capital is a gross misnomer—as successful independent recruiters will most certainly attest.

Yes, many of the unemployed will be unable to succeed in or even attempt self-employment. Others may succeed only at self-under-employment. However, the point remains that being refused does not automatically assure that one’s talents and skills will be squandered—a claim that successful independent, self-employed recruiters and all other successfully self-employed, not under-employed working people would deny and probably resent.

Is there no clear sense in which the refusal policy squanders human capital? There is—and more than one.

  • Wastefully high opportunity costs: If a currently employed worker is hired as a result of policy-based exclusion of the currently unemployed, there are certainly going to be instances in which the wrong person is hired, e.g., because of performance, efficiency, productivity, experience, character or capacity inferior to the unemployed individual whose resume was trashed upon discovery of his or her unemployed status.
  • Failure to hire at all:It is easy to imagine a very small town in which the only available talent is unemployed, yet a given manager who is either overly optimistic or unemployment-phobic prefers to wait for the “stranger on the white horse” to ride into town to fill the job. In that instance, the local human capital would be squandered in terms of lost (wo)man-hours of productive work that could have been done and have been wasted. (This micro-economic example does not invalidate the prior macro-economic thesis that from the standpoint of the overall economy, talent need not be squandered in the process of playing employment musical chairs with currently employed workers.)
  • Utilizing human capital in extremely inefficient or unproductive ways:A scenario in which this happens is very similar to the high opportunity cost case—the wrong person is hired on the basis of having been currently employed at the time of the new hire. The inefficiencies of that hire are the manifestation of the high opportunity cost associated with that hire.
  • Artificial inflation of compensation packages: To the extent that the wrong person has been hired as a result of the bias favoring the currently employed, the compensation package that could have bought more talent for the buck will have been created and applied artificially, namely, through the artificially rigid policy of refusing the unemployed, rather than through the natural force of real credential competition (a point to be made despite the predictable protest that the unemployed are, in virtue of being unemployed, probably inferior to the currently employed—a claim that at best is only statistical and at worst, in the individual case, often dead wrong.)

Squandered Opportunity

So, yes, refusing to hire the unemployed can clearly, at least in individual instances, represent a squandering of human capital, e.g., when it is artificially left idle or passed over at the expense of an employer who not only favors, but also only exclusively hires currently employed candidates. However, there is no automatic squandering of such human capital when the unemployed are motivated to work for themselves as bosses rather than as employees.

In that instance, the only squandering is of the opportunity to recruit that talent before it chooses to recruit itself.

By Michael Moffa