Reduce Worker Shortages By Reining In Benefits

Anecdotes about worker shortages abound. There is the McDonald’s restaurant in Florida that is paying people $50 just to show up for an interview. Or take Jimmy John’s, the sandwich restaurant, which is offering signing bonuses to new hires. These restaurants say they need workers, and are having a hard time finding them.

Many conservatives have been quick to suggest that the reason businesses can’t find workers is the generosity of pandemic-related government income support to households, especially the $300 weekly federal supplement to standard state-provided unemployment benefits. If workers are being paid so much to remain on the sidelines, they argue, is it any surprise that businesses are struggling to find the employees they need?

The unemployment rolls are still bloated. Data released this morning show that continuing claims for ongoing unemployment benefits rose for the week ending April 17, the first weekly increase since the year began. New claims for benefits fell for the week ending April 24 to their lowest level since their peak following the onset of Covid-19, but there are still around three times as many workers seeking benefits for the first time in a given week than there were before the pandemic.

Critics of all this generosity have the basic economics right, and I have little doubt that large checks from the government are playing a role in business’s experience. But they aren’t the dominant factor right now.

For one, Covid-19 is still keeping people out of jobs. Women with kids whose schools and day-care centers remain closed have great difficulty working, and there is a clear divergence in workforce participation between women who have kids in the home and those who don’t.

In addition, some people are still nervous to go back to work, and vaccines have only been widely available for a short time. Taken together, employment in retail trade and leisure and hospitality — virus-sensitive sectors — was down 11% last month compared with February 2020, the month before the lockdowns began. Outside these two industries, employment is down by much less, around 4%.

Another reason to be skeptical that generous unemployment benefits are the main culprit behind perceived worker shortages — at least right now — is precisely because the stories we’re hearing are so concentrated on restaurants. If the benefits were really driving this, you would expect to hear complaints from a wider range of businesses and sectors.

Part of the reason workers are scarce is that the economy is heating up across the board. Computer chips are in short supply. A booming housing market has contributed to soaring lumber prices. As the economy recovers, it is a sign of health that businesses need to compete harder to retain and recruit workers.

So far this spring, Covid-19 has still played a large role in economic decisions. But that will be less true with each passing month, and this summer extra-generous unemployment benefits will likely slow the labor market recovery and make it harder for businesses to find workers.

Unemployed workers are typically eligible for around half of their previous weekly wages. That amount varies by state, but the average weekly payment last month for the U.S. as a whole was $350. The federal $1.9 trillion pandemic relief and stimulus law adds $300 to that amount, a supplement that lasts until early September. Taking this supplement into account, a recent paper estimates that 48% of workers have higher income from unemployment benefits than they would from working.

Some progressives argue $650 per week in unemployment compensation won’t keep people from taking jobs. They offer three arguments, none persuasive.

First, they say, fear of the virus and slack labor markets meant that generous benefits did not significantly increase the numbers of workers unable to find jobs. Therefore, the argument goes, they will not this summer.

But in normal circumstances, larger unemployment checks increase the length of time people spend unemployed. As fear of the virus fades, economic activity will normalize. As the economy booms, labor markets will tighten, making workers on the sidelines a bigger brake on the recovery.

Second, the progressives say, unemployed workers will know that the extra benefits expire in September, and won’t delay accepting a good job offer for fear of missing out on opportunities available immediately.

But the summer will likely see employers chasing workers, rather than the other way around. The unemployed will feel they have ample options, and generous government compensation will lead them to take longer to accept a job than they should. Moreover, the supplement will stay in place for an additional four months. That’s a long time.

Third, expect to hear that surging monthly payroll gains are prime facie evidence that unemployment benefits aren’t lengthening jobless spells. Economists making this argument should know better, expert as they are in counterfactual reasoning. Two things will be true at the same time this summer: The economy will add over one million jobs per month, and it would have added even more jobs if unemployment checks were right-sized.

Longer jobless spells are bad for the economy because they will reduce the ability of supply to keep up with surging demand, adding to inflationary pressures. They are bad for businesses that need workers. And the longer people are idle, the harder it is for them to get back to work.

The solution is to convert the extra $300 into a one-time re-employment bonus. With vaccines widely available, the government should be encouraging employment, and the bonus would only be paid when an unemployed worker starts a new job. These bonuses would still target government assistance on the unemployed, who would be the only group eligible for them. And they would still help households with a recent spell of unemployment to pay the bills.

When the extra benefits expire in September, expect progressives to want to extend them. Doing so would be policy malpractice. Conservatives, be prepared with a better answer: Don’t pay workers to remain unemployed. Pay unemployed workers to get back to work.

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).”

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