Why cheaper prices can hurt people who lost their jobs

Automation makes production cheaper

In the model, machines replace 20% of workers over ten years and productivity doubles. When all the cost savings pass to consumers, the price index falls by 30% under the model’s original rules (about 20% at the median in the current central specification).

This is the extreme scenario the research examines on purpose, not a forecast.

The benefit is indexed to prices, so it shrinks

The benefit is meant to preserve the purchasing power of people who lost their jobs. It is indexed to the price of goods, so when prices fall the amount in shekels falls too. Its purchasing power over goods is unchanged.

Rent does not fall

Rent, mortgage payments and maintenance are set in shekels and do not move with goods prices. So the same housing payment comes out of a smaller benefit, and what is left for everything else shrinks.

The renter falls below the floor, the owner does not

In this simple arithmetic, someone living in a home they own keeps the same consumption. The renter loses about 14% and falls below the 90% floor the research uses to define keeping one's living standard.

In the full model, when all savings pass to prices, displaced workers who rent kept their consumption in 11 of 24 paths, against 17 of 24 for owners without a mortgage.

And why it is hard to fix

The obvious fix is to index the benefit to housing costs as well. In the model this works in every path where the budget has room (64 of 64, under the original rules). But the same fall in prices also hits the budget: savings move from corporate profits, which are taxed, to consumers, and interest on public debt does not fall.

In the central specification, when the saving passes to prices rather than staying in profits, state revenue actually rises by about half a point of output, but real interest on the debt rises by about 0.8 points, so what is left for benefits shrinks by about 0.25 points of output: nominal debt is more expensive when prices fall. When debt reaches the cap, the government first levies profits and only then rations the benefit, and for renters the result stays at 11 of 24.