The federal expansion to unemployment insurance (UI) just ended, giving hope that a swifter economic recovery will follow. While UI was a lifeline for many workers during the worst phases of the pandemic, the introduction of effective vaccines against COVID-19 last spring shifted the economy from “neutral” to “recover” mode — at least it should have. Employers have had persistent problems finding workers to fill jobs, even in the face of rising wages, better benefits and hiring bonuses. New evidence suggests that maintaining the expanded UI benefits for too long may partially be to blame.
The public debate over expanding UI benefits started even before the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed in March 2020. That legislation created several new programs that expanded or extended the UI programs provided by each state.
Federal Pandemic Unemployment Compensation (FPUC) is the best known of these, since it provided a federal $600 weekly bonus (later $300) on top of regular unemployment insurance. Pandemic Unemployment Assistance (PUA) was arguably just as important, since it made millions of independent workers eligible for UI (and therefore the FPUC bonus as well).
Many workers are still receiving UI because of Pandemic Emergency Unemployment Compensation (PEUC), which extended the timeframe that someone could receive UI benefits (and again, the FPUC bonus) from 26 weeks on average to as many as 79 weeks.
Economic theory, empirical research and commonsense tell us that providing support payments to jobless workers will reduce their motivation to find new employment. There’s nothing controversial about this, and workers are simply making a rational choice given the options available to them. Nor does this fact impugn the morality or work ethic of anyone who receives UI benefits. It’s just a simple statement of cause and effect: If the government makes a bad situation more bearable, there will be a slower exit of people out of that situation.
At the same time, unemployment insurance provides important social stability and economic value. UI participation peaked at 23 million in May 2020 for good reason — we needed people to reduce the spread of COVID-19 when we knew very little about it. The federal programs helped people survive that frightening spring.
The fact that UI tends to reduce the rate at which people find new jobs doesn’t invalidate its social value. Both things can be true at the same time. Economists like to say that there are no real solutions, only tradeoffs. With UI, the tradeoff is between the economic efficiency and growth created by swifter returns to employment and the better social stability and worker-employer job matches that come when there’s less urgency to reenter the job market as quickly as possible.
Previous UI programs tried to thread this needle in multiple ways. Benefits generally replace 40-50 percent of a worker’s prior income in order to make going back to work worthwhile. Most states limit a worker’s eligibility to 26 weeks, because the longer a worker remains unemployed, the more their skills, professional connections and appeal to employers degrade. That’s also why UI programs require benefit recipients to consistently look for work and accept a job offer within their skillset. The intent is to support the worker while they’re down on their luck, while being mindful that too much help in the short term can reduce workers’ future income and general career success.
That is why the 26 states that opted to exit the federal UI programs early were actually acting in workers’ best interest. Those states are generally leading the national economic recovery, with low unemployment rates and record job openings. In such a situation, there was little reason to continue demotivating workers with the federal programs.
The disappointing August jobs report – showing that employers added less than one-third of the payroll jobs that economists expected – has only added fuel to the fire. But because the data is muddy, with the household data showing different results than the business data, there’s ample ammunition for advocates on every side of the issue to make whatever argument they want. My own careful research finds that the states that ended participation in federal UI programs experienced twice the employment growth as those states that maintained the programs.
My concern is that when employers see the cost of attracting a worker rise too fast, or when they simply can’t find the workers they need, they tend to turn to automation to solve the problem. In other words, the last workers to return to the labor force might find that employers have changed their operations, leaving the workers high and dry. If that’s true, we’ll be seeing the start of another “jobless recovery” facilitated by too much compassion and not enough economic understanding.
Michael Farren is a research fellow with the Mercatus Center at George Mason University and the author of the new study “COVID-19 Expanded Unemployment Insurance Benefits May Have Discouraged a Faster Recovery.”