Unemployment Insurance Is Not The Problem

Many claim expanded unemployment benefits are disincentivizing work and creating a labor shortage. In reality, these concerns are overblown or outright false, and the insurance benefits are the only thing preventing millions of people from falling into poverty.

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Over the last few months, there have been increasing calls to end the expanded unemployment benefits passed in response to the COVID-19 pandemic. The 2020 CARES Act offered laid-off workers a 600 dollar bonus on top of regular unemployment insurance payments, which has been revised down to 300 dollars a week. Since the usual benefits only replace a fraction of a worker’s income, these bonuses were necessary to keep the millions of unemployed workers afloat during the pandemic. However, as the economy has crawled back from the brink, there have been more people in the government and media calling to end these expanded benefits. They claim that these benefits are actually hurting our labor market.

In the wake of April’s job report, where economists expected one million new jobs but only saw 266,000, many Republican states have moved to end the expanded benefit program within their borders. More states will likely follow. These conservatives claim that unemployment insurance is offering a disincentive to work. In their minds, there are hundreds of thousands (or maybe millions) of workers who are deciding not to search for work because they can live off unemployment. This disincentive, they claim, is a primary reason behind the disappointing jobs report and a major harm to our economy.

While this is a nice theory, it is completely contradicted by the data, and ending the benefits expansion would be disastrous for the American people.

Firstly, the idea that people are not going back to work is just plain false. For several months, the labor force participation rate (roughly the percentage of our population employed or looking for work) has increased. This increase shows that people are returning to the labor force—not staying home. Almost one million workers have returned to the labor force this year, and we are still on an upward trend. Additionally, people are not just staying on unemployment insurance. Since the start of 2021, the number of continuing unemployment insurance claims (the number of workers already receiving benefits who reapply for another week) has dropped by over 1.5 million. Workers are not idling on the sidelines; they are actively leaving unemployment insurance.

Empirical research backs up these claims. A February 2021 study from Yale economists investigated whether the generous unemployment insurance was disincentivizing work. Workers whose insurance benefits were close to or greater than their regular earnings did work less hours and were less likely to regain employment; however, these effects were present regardless of the benefit expansion. Before Congress ever increased unemployment benefits, this effect existed. After the benefits were reduced, the effect persisted. As the researchers say, if the generous benefits were disincentivizing work, the reduction of generosity would have pushed more workers to get jobs—it didn’t. The economists’ conclusion is that the recession and COVID-related health and safety concerns kept people from finding or searching for jobs and that unemployment insurance was a marginal factor as most. Low-wage jobs like food and hospitality work were wiped out during the pandemic while most medium and high-wage jobs remained. The fact that these workers were more likely to stay unemployed is probably because their work was simply gone—not because they were eager to collect unemployment.

The myth of worker idleness is thus debunked. What, then, explains the claims of employers that they cannot find workers? I’m sure many readers will have seen social media posts and news articles about restaurants or stores complaining how they cannot find employees. This trend certainly exists, although I suspect it is overblown by a press overly concerned with business interests. There are several reasons some businesses are facing trouble rehiring.

The first is a simple time lag. You cannot build a workforce in a day or two. When you are talking about an entire national economy, you cannot even build it in a few weeks or months. It makes perfect sense that employers are facing delays. It takes time to communicate job opportunities to unemployed workers. It takes time to interview applicants. Many companies have been shuttered for months, so it’s not like they are hiring some extra hands. They are trying to hire an entire staff all at once. Even after hiring tens of workers, they could still be short. Data bears this out, as well. Over 20 percent of current job openings have only existed since January. Hundreds of thousands have only been posted for a few weeks. Basic lag time explains a lot of this trend.

Secondly, many workers have moved on from jobs in shut-down businesses. In the many months of the pandemic, many workers abandoned their old employers and found jobs elsewhere. They may have even left their industry entirely. Anecdotally, it seems much of the labor shortage is affecting restaurants and fast food establishments. Since these places were closed for much of the past year, it makes sense that workers have left this sector for different types of employment. Much of businesses’ old workforces have moved on, so employers cannot simply rehire their old employees. It is also important to consider that restaurant and food service jobs are some of the lowest-paying in the entire country—many pay little more than the poverty line. Those who left the industry won’t be keen to ever return.

This trend of moving on is amplified when you consider the move into gig work. Because of the massive job losses early in the pandemic, it is likely that many people started working for gig companies like Uber or DoorDash or started freelancing in general. With many business shuttering, these jobs were at least sustainable. Hard data is spotty, but researchers have found several indications that many workers moved into the gig economy during the pandemic. There are definitely issues with the gig economy, but it is easy to see the appeal of “working for yourself” when your last job was a dead-end, minimum-wage position at a restaurant. Again, workers have moved on to better or more secure employment, leaving old bosses with labor shortages.

Of course, restaurant and store chains that are raising wages to fair market rates are largely escaping these problems, which points to employers (not employees) being the problem. If another company is offering higher pay, they’re going to outcompete low-wage employers quickly. It’s likely that a lot of bosses who claim they are facing a shortage are too stubborn to admit that they won’t pay what the market demands.

The evidence shows that business’ labor problems are not due to lazy workers sitting back and collecting unemployment. Workers are continually returning to the workforce, and isolated shortages are better explained by time lag and labor movement among industries. It’s not that people aren’t willing to work; it’s that they are unwilling to work for starvation wages that have been manipulated below a fair market rate. The current push to end pandemic-era unemployment insurance is misguided; the entire premise is false. Worse, the growing tendency of conservatives to cut the benefits will harm many Americans and our long-term economy.

There are still not enough jobs to go back to. Our economy’s GDP has still not recovered to the point it was at before the pandemic, and this problem has carried over into the labor market. We are on an upward trend with employment, but there are still issues. The Bureau of Labor Statistics estimates there are still more unemployed workers than there are job openings. There is a large margin of error for the job opening estimate, but it is safe to say that even if all available jobs were filled there would still be people left unemployed (especially when you remember the unemployment numbers are undercounts themselves.) The problem is compounded when you realize that not every job can be filled by any worker. Many positions will require education, certification, training, or experience. Those job openings are not available to every unemployed worker—only to a fraction of them.

Ending the expanded unemployment insurance will not magically create new jobs for all the unemployed. It will just thrust them closer to poverty as they suffer with no job and meager unemployment insurance.

Other than the immediate human suffering that the unemployment benefits will prevent, the pandemic-era expansions will be a long-term benefit for our labor market. Usually, recessions put downward pressure on wages. With so many workers laid off, employers gain a lot of leverage when it comes to wage-setting. Low and medium-wage workers cannot easily afford to stay unemployed, so they have to take the first job they can—even if it offers terrible pay. Our current unemployment benefits are counteracting this problem. Along with other pandemic-era measures, expanded insurance has given workers greater leverage when it comes to wages. They won’t face immediate eviction or hunger if they reject a job offering obscenely low wages. While companies would like to see a return to this desperation—it allows them to coerce the labor market and artificially lower wages—the current benefits are leveling the playing field and ensuring fair pay. With these expanded unemployment benefits, we can avoid the wage cuts that usually accompany recessions. When our economy fully recovers, the working class won’t be struggling to reclaim their former income level; they’ll be financially whole and ready to share in the gains of the economy.

In the coming months, there will be a time where rolling back the unemployment benefits makes economic sense. It seems reasonable to let the expanded benefits expire in September as planned. The labor market is recovering more every day, and emergency benefits won’t be necessary once the emergency has passed. For now, though, we are seeing a win-win. Our insurance system is protecting working families—keeping them financially stable and offering them leverage in wage negotiations. At the same time, our labor force continues to grow and workers continue to find jobs. Knowing all these facts, the push to cut unemployment benefits is completely reckless and misguided. Cutting our safety net will not improve our economy or save businesses. It will just put more people in jeopardy. In an economy that is recovering but still in trouble, worker security should always be paramount.

Katharine Sciackitano is a second-year Economics major in the College of Arts and Sciences. She serves as Deputy Editor for Economics at the Agora.

Image courtesy AFL-CIO Field, Creative Commons