Extra Jobless Benefits Aren’t Holding Back the Economy

With overall employment appearing to bounce back, the argument by some politicians that overly generous enhanced jobless benefits are impeding the economic recovery is losing steam. Moreover, the extra cash will turn out to be a good thing in the long run.

Since the American Rescue Plan Act of 2021 was passed earlier this year, unemployed people have been authorized to receive an additional $300 in weekly federal benefits in addition to any other payouts they collected. Those extra benefits are being phased out in September, but dozens of states have opted to end them earlier, citing labor-market shortages.

It does seem as if the bigger unemployment payouts have delayed some Americans from reentering the labor force, but the broader upward trend is clear. Nonfarm payrolls increased by a better-than-expected 850,000 last month, and the number of job seekers rose, the Labor Department’s monthly employment report showed on Friday.

The gains aren’t uniform, of course, as illustrated by the recent initial jobless claims data. Namely, states that have ended benefits early have generally seen a faster pace of residents coming off the jobless rolls, preliminary figures show.

To get a sense of this divergence, consider the data assembled by Jefferies LLC Chief Economist Aneta Markowska from this week’s initial jobless claims. Her team found that claims declined 2.7 percent from the week earlier in states that ended enhanced benefits early and rose 2.8 percent elsewhere.

“Since mid-May, claims are down 12.6 percent in early expiration states and just 3.4 percent in September expiration states, so the gap continues to widen,” Markowska wrote in an email Friday.

The data isn’t perfect because it’s hard to control for factors such as  greater availability of child care, fear of getting ill and different paces of vaccinations and reopening in different states. But nevertheless, let’s assume that it’s generally correct in direction.

The reason this is so important is that businesses can’t grow and return to full capacity if they can’t find workers. And that’s the complaint as “help wanted” signs spring up in almost every corner. “Labor challenges across the entire value chain continue to be the major obstacles to increasing growth,” Timothy Fiore, chairman of the Institute for Supply Management’s manufacturing business survey committee, said in a statement this week. The issue is especially loaded when nearly 7 million fewer Americans are working today compared with the level before the pandemic, as highlighted by the jobs report.

But this friction, of so many people out of work while labor shortages abound, is nuanced. For most working-age people, it takes more than just a temporary chunk of cash to remain out of the labor force. As Oxford Economics economist Oren Klachkin wrote in a June 30 report, “Overall, the value of a job outweighs the value of unemployment benefits.” He estimated that benefits would have to range from $1,600 to $3,200 a week, on a per-state basis, to persuade people to remain jobless.

He came to a similar conclusion suggested by the findings of a recent paper from the San Francisco Federal Reserve, which found that only one in seven out-of-work Americans rejected job offers because of the additional $300-a-week support. Workers are staying home with their out-of-school children. Others are finding they don’t have skills that are as relevant now as before the pandemic, given the turbocharged shift to everything online. For still others, they may still have residual health issues or concerns or are taking a little longer to find the right position. 

But let’s just say a significant number of workers took their time returning to the labor force because of the extra cash. Even so, it’s still hard to see these enhanced benefits as anything other than a boon to economic growth. It’s a key driver behind the high savings rates and lower debt levels among Americans, who now have more than $2 trillion in excess savings to deploy. It has helped fuel the spending that prompted the leisure and hospitality sector to add 343,000 jobs in June.

And it has enabled workers who are busy with children at home to maintain their spending at a level, knowing they’ll reenter the labor market in the fall when their children go back to school.

Ultimately it comes down to an issue of timing. How do states withdraw extra support? And how closely should that be linked to vaccination rates, hospitalizations and Covid-19 case numbers? These are tweaks on the margins, perhaps ways to even out the kinks in the labor-market frictions. I’m sympathetic particularly to small-business owners who are struggling to find anyone to apply for their jobs while paying wages that don’t jeopardize their companies’ survival.

On the whole, it’s hard to argue that these enhanced benefits were anything other than a net positive for the individuals and for the economy as a whole as it seeks to pull itself out of the most severe downturn since the Great Depression. It put more money in the hands of people who were most likely to spend it just as the economy roared back to life following the worst health crisis in modern history. That should not be lost on politicians who excoriate the extra payouts as the labor market straightens itself out.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Lisa Abramowicz is a co-host of "Bloomberg Surveillance" on Bloomberg TV.

©2021 Bloomberg L.P.

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