Biden’s Unemployment Checks Would Harm Economy
(Bloomberg Opinion) -- At a time when the economy is growing rapidly again, the last thing Congress should do is make unemployment more financially rewarding than working.
Unfortunately, a part of President Joe Biden’s $1.9 trillion pandemic relief plan would do just that. The president proposes paying unemployed workers a $400 weekly supplement on top of other jobless benefits they receive. If adopted, the additional funds will have the perverse effect of hurting the labor market, leading to more joblessness.
Unemployed workers are typically eligible for around half of their previous weekly wages, up to a maximum amount. This strikes an appropriate balance. Unemployment compensation helps households continue to pay their bills, stretch out their consumption over time, take time to find a new job that matches their skills and experience, and support aggregate consumer spending. Yet the amount is not so generous that it causes a harmful increase in the length of joblessness.
The standard weekly benefit varies widely across states. Prior to the pandemic, Massachusetts and Hawaii each paid around $550 per week, on average. Alabama, Tennessee, Arizona, Louisiana and Mississippi paid an average of less than $250. The weekly average for the nation as a whole was $387.
When the pandemic struck last March, Congress added $600 to standard benefits, bringing the total amount an unemployed worker could receive in a week to an average of around $987. The goal of the $600 supplement was to replace (roughly) all the income people lost from being unemployed, rather than just the fraction of their income that standard benefits would replace.
This policy meant that the unemployed were much better positioned to meet all their expenses during a period of extraordinary uncertainty and significant anxiety. And the extra compensation gave a needed boost to the economy by supporting overall consumer spending, helping businesses to stay open and to keep their workers on the payroll.
Many economists, myself included, would normally have been worried that fully replacing lost income would keep many people on the unemployment rolls and out of paid work. But the situation last spring was anything but normal. During the severe lockdowns of that time, one goal of the policy was to stop the unemployed from looking for work, because if they were handing out resumes and going on job interviews they risked spreading the virus.
During the spring lockdowns, the downside of unemployment compensation — that it encourages workers to remain jobless — was actually a strength. Moreover, with unemployment skyrocketing and labor demand collapsing, relatively few jobs were available.
The widespread expectation at the time was that lockdowns would last a couple months. The labor market began to recover in May, but it remained extremely weak for months. So it’s not surprising that economic research suggests that the $600 supplement did not reduce hiring or employment throughout the summer.
But just because the unusually generous unemployment benefit didn’t keep workers out of jobs in the early months of the pandemic does not mean that it wouldn’t in the summer and fall of 2021. A large body of research finds that more generous compensation led to longer periods of joblessness. This evidence, and not what happened in the spring and summer of 2020, is a better guide to the current year.
Every week the U.S. is closer to herd immunity. Vaccines will likely be in wide distribution this summer. Economists expect the unemployment rate to fall and the economy to grow substantially this year. For example, economists at Goldman Sachs forecast GDP to grow at an 11% annual rate this spring and at nearly 7% for the year as a whole. Businesses will be hiring.
The Biden administration wants to top up unemployment benefits by $400 per week through September. Under this plan, the average unemployed worker would receive over $3,000 per month in benefits. A recent paper finds that if the president’s plan were enacted, 62% of workers would receive more from unemployment compensation than from working. For over one-quarter of workers, weekly benefits would be 40% larger than their weekly wages.
In an expanding economy that is putting the virus behind it, paying people more in unemployment than they could receive from working is an act of substantial economic self-harm. It would keep workers on the sidelines, stop the unemployment rate from falling as rapidly as it otherwise would, and slow the overall recovery.
Yes, people will know that the program is temporary. But the eight months between now and the end of September is a long time. And small changes in behavior add up. Even if the unemployed only cut back their job search from, say, five days to four because their benefits were so generous, the recovery would still slow.
The people who linger especially long on expanded benefits could risk experiencing a spell of long-term unemployment. Those who are jobless for six months or longer become less attractive to employers as their professional networks fray and their skills deteriorate. It becomes harder and harder for them to find jobs. They don’t just suffer economic harm. They face a higher risk of physical and mental health problems, including greater mortality risk.
In December, Congress passed a $900 billion stimulus law. Though it seems to have been forgotten, it provided a $300 weekly supplement to standard unemployment compensation that will expire in mid-March. Congress should let federal additions to standard benefits expire at that time. The most Congress should do is put the $300 on a path to zero over the spring.
There is much to like in the Biden plan, and the president is right not to skimp on money for vaccine distribution, testing capability and reopening schools. But when it comes to unemployment benefits, being too generous would slow the recovery — and hurt the workers the policy is intended to help.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and Arthur F. Burns Scholar in Political Economy at the American Enterprise Institute. He is the author of “The American Dream Is Not Dead: (But Populism Could Kill It).”
©2021 Bloomberg L.P.