The myth of unemployment benefits depressing work
But five recent economic studies find no such thing is happening.
As coronavirus cases surged in the spring, Congress passed bipartisan legislation that allayed some of the pandemic’s economic pain. One critical provision of that rescue effort, a $600 federal supplement to state-level unemployment benefits, expired last week.
State benefits, on average, cover about 40 percent of the typical worker’s lost wages, says Michele Evermore, senior policy analyst at the National Employment Law Project. Given the extraordinary economic crisis, federal lawmakers wanted to “top up” state benefits so that workers would get close to 100 percent of their lost wages. Because so many states’ unemployment IT systems are ancient and decrepit, though, targeting a specific fraction of lost wages proved nearly impossible to administer. So Congress passed a $600 weekly supplement because it seemed about the right amount to make the average worker whole.
That flat amount meant, however, that some workers would get total jobless benefits that exceeded what they used to earn in wages. And because the recession has hit lower-income workers especially hard, a majority of unemployed workers received more in benefits than they earned in their most recent paychecks.
Perhaps understandably, this prompted concerns that the benefits themselves might slow down the recovery, discouraging people from returning to work because being on the dole was too darn comfortable. Treasury Secretary Steven Mnuchin, in an interview Sunday, cited as evidence a study from University of Chicago researchers that, in Mnuchin’s characterization, “goes through all the people that are overpaid.”
Almost immediately, one of the study’s co-authors, Peter Ganong, said no, that is not in fact what their analysis found. Their research did calculate that the median wage replacement rate is 134 percent (so, yes, more than the typical worker used to earn), but, crucially, the study did not look at whether these more-generous benefits discouraged work.
Fortunately, at least five other recent studies examined exactly this question.
These analyses are by researchers at Yale; a group from the University of Illinois at Urbana-Champaign, University of Chicago and University of California at Berkeley; economists from the University of Pennsylvania, the Federal Reserve Bank of New York and Glassdoor; an economist at the University of Massachusetts at Amherst; and an economist at Evercore ISI.
Using a variety of government and private-industry data sets, they all concluded the same thing: The $600 federal supplement does not appear to have depressed job growth.
As the Yale economists summarized: “We find no evidence that high [unemployment insurance] replacement rates drove job losses or slowed rehiring.” The Evercore ISI economist, Ernie Tedeschi, also observed that in June, around 70 percent of unemployment recipients who resumed working had been receiving more from benefits than their prior wage — yet nonetheless returned to work.
Why might this be the case?
Because, as a recent survey of elite economists from the University of Chicago’s Initiative on Global Markets found, the main force holding back job growth is firms’ lack of interest in hiring, not people’s unwillingness to work at prevailing wages. With U.S. unemployment in double digits, job vacancies depressed and jobless benefits temporary, most workers don’t want to lose any shot they might have at reemployment.
To be sure, some employers have offered examples of individuals turning down jobs. But whether these workers rejected offers because of high unemployment benefits (vs. other factors, such as fears of infection or lack of child care) is difficult to parse. More important, despite these individual anecdotes, these studies all show that, on net, higher government benefits are not currently depressing employment.
If anything, research to date suggests the federal benefit supplement has boosted macroeconomic activity and, therefore, likely supported hiring. That’s because these benefits have supported consumer spending, which in turn helps retailers, landlords and other businesses keep workers on their own payrolls.
The goal of unemployment insurance is twofold, after all: compassion (help struggling families put food on the table and keep a roof over their heads) and stimulus (support consumer spending so the economy can recover more quickly). For both reasons, Congress should immediately renew this supplement — ideally in a form that links benefit levels to public health and economic conditions, and that phases out as the dual crises abate — as some Democrats have already proposed.
Yes, at some point, Mnuchin’s fears about work disincentives may materialize, as the economy recovers and job opportunities become more plentiful. We’re nowhere near that point now.
Read more:
