There’s No Work to Disincentivize

But, even if there was, that would be okay.

Hello everyone, it’s Colin. Long time no see.

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On July 31st, the last round of Congress’s $600 in enhanced weekly unemployment benefits went out to nearly 30 million unemployed workers.

The expiration of the enhanced weekly unemployment benefits follows an impasse between Republicans and Democrats on how to continue the program. Democrats want to extend the benefits as is to January of next year; Republicans countered by proposing a reduced $200 in enhanced weekly unemployment benefits until October 5, followed by a new scheme that would replace up to 70 percent of previous wages, capped at $500 additional per week thereafter.

Republicans have sought to cut the enhanced weekly unemployment benefits since before the CARES Act was passed in March. Ben Sasse (R-NE) introduced an amendment that would have capped unemployment benefits at no larger than a worker’s previous wages. He introduced the amendment in part because he, along with many Republicans, worried that the enhanced weekly unemployment benefits would exceed 100% of previous wages, disincentivizing workers from returning to the workforce.

The first part is true. Many workers received over 100 percent of their previous wages through the combination of their state’s baseline unemployment insurance benefits and the federally funded enhanced weekly unemployment benefits. A paper out of UChicago shows that the average unemployed worker had their wages replaced at 134 percent, which amounts to two-thirds of workers making more on unemployment than they did in their previous jobs. So despite the United States plunging into the worst recession since the Great Depression, a combination of the additional income from the enhanced unemployment benefits and the $1,200 economic impact payments made personal income grow at a record 12.1 percent in April.

How unemployment insurance works

Unemployment benefits generally work in a very straightforward way. If you lose your job involuntarily, you can file for unemployment with your state unemployment office. They will then issue you a weekly check for a portion of your previous wages so long as you continue to look for employment and do not turn down other job offers. There are numerous exclusions to this generalization and lots of state-by-state variation, but this is the gist of how unemployment insurance works in the United States. 

The CARES Act flipped this script in some ways. A flat $600 a week was added to the standard unemployment check going out. The CARES Act also allowed workers in positions historically not covered by standard unemployment insurance programs – such as gig workers or self-employed workers – to claim benefits. The legislation expanded the eligibility criteria so workers affected by COVID-19, such as those diagnosed with the virus, those who had a credible fear of the virus in their workplace or parents of children whose schools closed, would be able to claim unemployment benefits even if they were not involuntarily let go from their jobs.  

Let’s say a business laid off its workers in March following the initial lockdown orders. Those workers then would be able to claim unemployment benefits, that for the sake of this scenario end up surpassing the wages they made at their former job. June rolls around, the lockdown orders are eased, and the business starts calling its formers employees to come back to work. Normally, if a worker refused this offer, their unemployment benefits would be ended. But under the CARES Act, if a worker refuses to go back to work citing credible fear of COVID-19 exposure in the workplace, they might be able to continue to receive their unemployment benefits. This is the type of scenario that Republicans were concerned about hampering the United States’ economic recovery. But the evidence makes it clear this is not happening on a large enough scale to distort the labor market.

The state of the labor market

Several papers from researchers have shown that the enhanced weekly unemployment benefits are not having a broad disincentivizing effect on workers reentering the labor market. In “Employment Effects of Unemployment insurance Generosity During the Pandemic” by a team of Yale economists, researchers used time clock data from small businesses and exploited the variation in the generosity of unemployment benefits state-by-state to show there was no correlation between workers returning to the labor force and the generosity of unemployment benefits in their state. UMass Amherst economist Arindrajit Dube used a similar research strategy, focusing on workers over the age of 18 without a college degree, and showed how that demographic group experienced no change in employment due to the enhanced weekly unemployment benefits despite their vulnerability. Ioana Marinescu of UPenn and a team of researchers showed that employers still saw more job applicants per opening after the CARES Act was passed, even in the lowest-wage occupations.  

There is also an intuitive way to think about the work disincentive issue. Take the leisure and hospitality industry, which has been hit particularly hard by the pandemic. According to the Bureau of Labor and Statistics, as of May 2020, 3.8 million workers in the leisure and hospitality industry were unemployed. During the same month, there were 600,000 open jobs in the leisure and hospitality industry. Ignoring likely occupational and geographic asymmetries, this means that for every available job in the leisure and hospitality industry, there are over six unemployed workers for that given job. Disincentives like unemployment insurance are known to have a marginal effect, so only a fraction of workers would be demotivated to return to the workforce. So in this scenario, even if one or two workers are disincentivized from seeking work due to the generous unemployment benefits, in such a sharp downturn such as the coronavirus recession, there are still four or five other workers competing for vacant positions.

Disincentivizing is actually good

There is still a larger public health question to consider: do we want workers returning to the labor force during a pandemic? Workers returning to the labor force implies that businesses are reopening, which in turn implies that customers are returning to the very nonessential businesses that were closed a few months prior due to the public health threat that they posed.

We have seen this scenario play out in cities across the United States that have begun to slowly reopen following an initial hard lockdown in the early Spring. Take Washington, DC for example. The city locked down in mid-March, closing down its restaurants and bars on March 16th and other non-essential businesses on March 24th. Over two months later, on May 29th, restaurants and bars were allowed to reopen for outdoor dining, while non-essential businesses remained closed to indoor shopping. Case numbers continued to fall.

Once Phase 2 began and non-essential businesses reopened, it took only 14 days (the maximum incubation period) for case numbers to begin rising again. What changed? Non-essential businesses reopened for in-person shopping and restaurants began offering indoor dining again (at 50% capacity). Prolonged indoor exposure has been shown to be the most infectious environment for COVID-19 transmission: the inherent environment of indoor shopping and restaurants.

This drive to reopen indoor dining and nonessential retail was not driven by consumption concerns. Americans do not need to be shopping for new designer clothes or dining out during a pandemic. Mayors and lawmakers reopened these businesses because of the reasonable pressure they faced from business owners and workers to stimulate the economy on their behalf.

But we did not need to face this choice. The United States government can pay, or disincentivize, nonessential businesses to remain closed, and for workers to stay home.

The idea to pay businesses to close and for workers to stay home has been proposed by prominent economic and public health experts. Minneapolis Federal Reserve President Neel Kashkari, along with Michael Osterholm, the director of the Center for Infectious Disease Research and Policy at the University of Minnesota, penned an op-ed in the New York Times proposing that the United States commit to a hard lockdown for up to six weeks until the infection rate is below 1 new case per 100,000 people. Under their plan, only non-essential workers would be allowed to work, and others would not be allowed to leave their house unless for essential reasons. While this may sound like the lockdown orders that were put in place at the beginning of the pandemic, Kashkari and Osterholm point out that those orders were not stringently or consistently enforced at the federal level and suggest that they should be. Their plan ultimately bears more resemblance to lockdown orders put in place successfully by countries like New Zealand.

A plan like this would be difficult to implement unless the United States government also offers economic incentives to keep people home. We have seen this play out earlier in the pandemic when business owners defied lockdown orders and continued to stay open. To prevent this, the United States government could provide businesses who comply with closing orders with enough money to make it through the crisis, and give workers who are unable to work in a hard lockdown enhanced weekly unemployment benefits.

While such a plan would be expensive, the United States government can currently borrow at historically low rates to finance it. Even with such a steep short-term cost, the plan might still be a long-run net economic gain. The longer the United States continues to hobble along with a half-hearted economy during a deadly pandemic, the worse the long-term damages will be that will reverberate in our economy for decades to come.


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