Let the Unemployment Benefits Expire

Veronique de Rugy.

"Economist Robert Higgs is well known for showing that government grows according to a ratchet effect: Government expands rapidly during a crisis and then recedes after the crisis is over, but it does not return to the pre-crisis level of involvement in our lives. But at this point, we need to expand the concept to include the fact that each time a crisis arises, the size of government’s response gets bigger and bigger, thus making ever more unlikely a return to pre-crisis size.

Case in point: the unemployment insurance during the COVID-19 crisis.

It is typical that during nationwide downturns the federal government provides supplemental funding to increase the unemployment insurance provided by the states. It can also increase the number of weeks unemployed workers are eligible for UI. During the Great Recession, the federal government allowed UI recipients to receive up to 99 weeks of benefits. It also funded an across-the-board increase in benefits of $25 a week in addition to state benefits, and imposed a few other mandates.
The COVID-19 crisis brought us the CARES Act, which expanded UI benefits by $260 billion. Unemployed workers who were already eligible for UI benefits under state and other federal programs receive from the federal government, compliments of CARES, a $600 check weekly regardless of hours worked, in addition to their regular UI benefits under state law, until July 31, 2020. If individuals remain unemployed after their state unemployment benefits are exhausted – which is usually 26 weeks – the federal government will also fund up to 13 weeks of additional unemployment benefits at a weekly rate of $600 during that 13-week period.

But CARES also expands eligibility to those who would not otherwise qualify for state UI but who cannot work because of the ongoing pandemic. This group includes self-employed workers, independent contractors, part-time employees, and those who quit their jobs for coronavirus-related reasons (like workers who are sick or taking care of a dependent, if these workers do not otherwise have paid-leave benefits or telework). The Act requires that these workers receive benefits that cover 100 percent of their weekly compensation while guaranteeing each of them a weekly check of at least $600, regardless of hours worked. These payments begin retroactively on Jan. 27, 2020 and end on Dec. 31, 2020, for up to a maximum of 39 weeks. There is also an expansion of benefits for employees whose hours were reduced.

How much of an expansion are we talking about? A paper released in May by Peter Ganong, Pascal Noel and Joseph Vavra of the University of Chicago finds the following:

“We find that 68% of unemployed workers who are eligible for UI will receive benefits which exceed lost earnings. The median replacement rate is 134%, and one out of five eligible unemployed workers will receive benefits at least twice as large as their lost earnings. Thus, the CARES Act actually provides income expansion rather than replacement for most unemployed workers. We also show that there is sizable variation in the effects of the CARES Act across occupations and across states, with important distributional consequences. For example, the median retail worker who is laid-off can collect 142% of their prior wage in UI,… while unemployed janitors who worked at businesses that shut down can collect 158% of their prior wage.”

There is already a large literature on the disincentive effects of unemployment benefits. There is also a fair amount of work done on the impact that the expansion of UI during the Great Recession had on workers’ incentives to return to work, as well as on the impact on the recovery. As such, it will surprise no one that with an expansion exponentially larger than the one put in place during the last recession, and the added feature that workers can quit their jobs and still be eligible for UI, the impact on employment is and will continue to be massive. 

First, there is much anecdotal evidence that restaurant owners and other smaller businesses have a hard time retaining workers or bringing workers back to work to operate their business today. Take the Board of Governors of the Federal Reserve System Beige Book. The Beige Book compiles evidence from the different Fed Reserves around the country. Here are samples.

According to the New York Fed: “A number of these firms noted that this has been challenging, with many unemployed workers reluctant to return to work — some attributed this to generous unemployment benefits, as well as safety concerns.”

According to the Philadelphia Fed: “When asked about impediments to recalling workers, 33 percent of the firms noted fear of infection and 25 percent noted lack of childcare; overcoming the lure of expanded unemployment benefits was noted by 29 percent of the firms.”

According to the Atlanta Fed: “Several employers noted concern that the generosity of unemployment benefits may make it difficult to attract workers once demand improves especially among lower paid jobs.”

According to the St Louis Fed: “Contacts reported that reopening firms were limited by labor shortages, which they ascribed to increased unemployment benefits, personal health concerns, and childcare responsibilities leading potential workers to stay home.”

Economists at the Heritage Foundation estimated that as of May “the extra $600 per week could be responsible for 13.9 million of the total unemployment claims.”

Leaving aside the question of whether it’s the role of government to supply unemployment insurance in the first place (it isn’t), our conversation about extending unemployment benefits should be informed by these numbers. Sadly, however, it isn’t.

The Democrats have proposed to increase the UI expansion all the way to March 2021 (seriously). A recent report by the Congressional Budget Office confirms what most students taking an Econ 101 class know: such an expansion of benefits would reduce both employment and output. That shouldn’t be surprising given that the report finds that the share of those earning more in UI than in wages is even higher than what others have predicted—5 out of 6!

But don’t discount the cleverness of the social engineers on the other side of the political aisle. While Senators Pat Toomey (R-PA) and Rand Paul (R-KY) rightfully think that the additional UI should expire, as planned, at the end of July, some of their GOP colleagues have come up with ideas such as offering workers more benefits if they choose to go back to work, or only a gradual reduction of benefits once they go back to work. Others want instead to subsidize payrolls. Senator Rob Portman (R-OH) has proposed providing a temporary $450 per week bonus on top of regular wages for people who leave the unemployment rolls and find a job.

Many of these politicians are concerned about the effect of higher unemployment rates on the outcome of the upcoming election. None of them seems to have any concern either for the taxpayers who will be stuck with the tab, or about the terrible precedent this expansion of government involvement creates.

Let’s be clear, once the economy recovers and the UI expansions expire, there will be plenty of jobs for workers to return to. This is not the Great Recession. People today are out of work not because jobs have disappeared due to a sudden fall in aggregate demand.

For the most part, people were thrown out of work largely by the fear of this virus keeping consumers home but also by state governments commanding everyone to stay home. This unemployment was inflicted by design to cause a radical shrinkage of the supply side of the economy in the hope to fight the virus from spreading. The best thing to do is allow the economy to reopen fully and allow companies to figure out for themselves, based on their consumers’ preferences, how to best operate their businesses.

The bottom line is that everyone needs to take a deep breath and let the unemployment insurance  expansions expire. People, sensible adults that they are, will then naturally return to their lives and jobs."