Does The Unemployment Fall Prove The $600 Benefits Didn’t Disincentivize Work?

By Ryan Bourne of Cato.

"The unemployment rate fell sharply in August to 8.4 percent. While an accurate pre‐​crisis comparator unemployment rate is undoubtedly slightly higher than this, this was an unexpectedly sharp fall in the official jobless rate.

The glass half‐​full reading is this: despite the massive pandemic shock, the unemployment rate in the U.S. is already as low as France’s in boom times (a testament to easy hire and fire laws and low levels of labor market regulation here).

The glass half‐​empty reading: this is still a long way from a full recovery and we’d expect that recent months would have seen some low‐​hanging fruit gains as closed businesses reopened, bringing back on board workers. In future unemployment might prove much stickier, if it results from more permanent company failures and realization that we are in a new normal until the pandemic is over.

Some have claimed that the sustained fall in unemployment from April through August shows that the $600 per week pandemic unemployment benefit expansion, which expired July 31, did not disincentivize people returning to work. This seems a bad take, for several reasons.

First, the Federal Reserve’s Beige Book this week reports a lot of contacts at state level saying that they continued to find it difficult to hire low‐​wage workers at the wages they were willing to pay. This suggests the supply of workers remained constrained somewhat by the high level of unemployment benefits in July and the expectation of some form of continuation of them after that (the President has since introduced a lower $400 unemployment supplement for four to five weeks, but Congress is considering its own actions).

The Beige Book national summary:

Firms continued to experience difficulty finding necessary labor, a matter compounded by day care availability, as well as uncertainty over the coming school year and jobless benefits.

The Federal Reserve Bank of Boston:

The majority of contacts reported difficulty finding candidates who were willing to work, especially for pay rates that might be lower than pandemic‐​augmented unemployment benefits.

Richmond:

Some contacts cited skills mismatches as a barrier to finding the workers they needed while others believed that the generous unemployment insurance benefits had discouraged workers from applying for available jobs. Also, multiple contacts said that some former employees were recalled but did not report back to work.

Atlanta:

Among those hiring, most indicated that the pool of available workers was ample, although there were reports that unemployment insurance benefits continued to present challenges attracting low‐​wage workers.

Chicago:

Several contacts again commented that generous unemployment benefits had made it difficult to bring payrolls back to desired levels, especially at the entry level.

And of those with surveys specifically mentioning August, the Federal Reserve Bank of New York report claimed:

Some businesses have noted less trouble bringing back furloughed workers and hiring new ones in recent weeks, as unemployment benefits were scaled back.

And Philadelphia:

Fear of infection and expanded unemployment benefits had become lesser concerns.

So, businesses in many parts of the country are convinced that the disincentive effects were and are real and that they then dissipated somewhat in August, when the scale of the unemployment benefits fell. But why then did we see falling unemployment through July too, when the expanded benefits were actually still in place?

One obvious explanation is that although some laid‐​off workers would have sought to pocket the benefits, others would have been more forward‐​looking. Without the knowledge about President Trump’s executive order extending less generous payments, many unemployed folk would have faced a risky decision: the security of a job now, or high benefits for a few weeks.

If the option then in spurning employment was perceived as receipt of 140–220 percent of past earnings in UI benefits for July but then falling to 30–50 percent of previous earnings and confronting the uncertainty of unemployment, it’s perhaps unsurprising that many accepted recalls or took up new roles.

In fact, I heard this story on a recent trip to a hotel on the West Virginia border. The worker told me that he was effectively furloughed and simply ignored his employers’ calls by turning his phone off for several weeks in May and June, such was the uplift in his income on pandemic‐​related unemployment insurance benefits. He ultimately decided to take up the offer to return in late June because he recognized that the expanded benefits might expire and he’d then be worse off unemployed.

If this story is in any way generalizable, then it has big policy implications. The recent jobs bounce‐​back would in part reflect the falling UI benefits from July to August and the expectation over a longer period that these additional benefits were temporary. The robust jobs growth therefore cannot be used as supportive evidence for continuing the $600 UI payments. If the $600 benefits had already been extended through the end of the year, the disincentive effect would have been sharper and we’d have heard louder complaints of the sort outlined in the Beige Book."