The perverse economic incentives of enhanced unemployment benefits (in numbers)

It is an interesting question whether the supplemental unemployment benefits in the stimulus legislation create a perverse incentive (1) for companies to push their payrolls onto the federal government for several months rather than bearing the costs themselves, and (2) for the unemployed to avoid searching for future work for a long duration.

An additional $600 per week in unemployment benefits has started going out as part of the coronavirus relief bill passed in March — but the new payments, combined with state unemployment benefits, already are causing concern that some workers could be in a position to actually make more money by leaving their jobs.

For an economy already fractured by social distancing policies meant to curb the spread of the coronavirus, the perverse incentive threatens to do further damage, according to workers, business owners and economists who spoke to Fox News.

“It’s a huge issue. A large slice of the U.S. workforce will make more money by not working than by working,” David Henderson, an economist and research fellow at Stanford University’s Hoover Institution, told Fox News.

The average state already gives out $463 per week in unemployment benefits. When combined with the new $600 per week, that works out to $1,063 per week – the equivalent of more than $26 an hour, or $55,000 a year.

That angers some essential workers on the front lines on the crisis.

“I can tell you as a worker who barely makes over minimum wage, at $12 an hour, the whole thing is complete BS,” Otis Mitchell Jr., who works in West Virginia transporting hospital patients to get medical tests, told Fox News.

Mitchell Jr. added that he has unemployed friends who already are getting the extra $600, and that “I prefer to work, but sadly I’d make more staying home.”

“I work in a hospital of all places and we aren’t being compensated anything [extra],” he added.

He said he also knows people at his workplace “who are just wanting to get laid off, completely because they’d get more money being at home.”

One of the problems with this situation is that there is considerable disparity across states as far as the level of unemployment benefits someone is eligible to receive. Fiscally conservative (or at least, what used to count as fiscally conservative) states like Florida only pay out a couple hundred dollars a week in benefits. No one in Florida could survive on that, unless maybe you live in a shack in the middle of the swamps. Conversely, some states have lavish unemployment benefits already. The stimulus legislation is icing on top of an already sticky-sweet cake.

There is a “stimulus” logic to providing people with a large injection of cash even if it means paying them more than they used to earn. If they are already working in a lower wage job and lack financial security, they are less likely to hoard that money. (Unlike relatively wealthy people, who just put extra cash into savings or investments.) The money they spend is going out into their local economy and helping jump-start the economy during what is looking increasingly like an economic depression and not a mere recession. That’s a good thing.

Like the man in the article, we have already personally spoken with acquaintances who prefer to collect unemployment and have a coronacation instead of finding new work right away. This incentive is doubled when they have merely been furloughed and still get to keep their health care and other benefits. (Assuming their company survives and does indeed want them back. They’ll cross that bridge when they come to it, I guess.)

Take a look at unemployment benefits in Washington state, for example:

A new study shows that many in Washington may be eligible to earn more in unemployment benefits through the duration of the federal CARES Act than they would normally earn while working their jobs.

Tens of thousands of Washingtonians are experiencing unprecedented hardship and have applied for unemployment benefits in the past month due to stay-at-home orders that have closed all nonessential businesses. Under normal circumstances Washington already has some of the most accommodating unemployment benefits, but with the additional $600 per week from the CARES Act, unemployment benefits for those most at risk would be greater than their normal wages through July 31st.

According to the newly-released study from Zippia, a career resource website, those earning less than $61,570 would actually qualify for more in unemployment benefits than their normal wages through July 31. The study also shows that Washington ranks second in the United States for the most annualized unemployment benefits due to COVID-19, with maximum benefits paying $72,280.

“No doubt, the passage of the stimulus has many laid off workers breathing a sigh of relief. However, many still working may be frustrated to realize their weekly paycheck is less than they would receive in unemployment,” wrote the researchers. “The new package does mean a good chunk of the workforce are now receiving paychecks smaller than they would on unemployment. This includes workers in essential businesses, including hospitals and super markets, who are putting themselves in harm’s way to keep society running.”

The stimulus package means sizable increases for Washington’s unemployed. For example, someone who earned a salary of $40,000 a year with zero children would receive $980 a week under the new COVID-19 stimulus plan, a 127.4% increase from their current weekly salary of $769. Before the stimulus package was passed, the same worker would have only earned $380 per week in state-funded benefits.

Oregon followed closely behind the Evergreen State, ranking 5th with a maximum annualized amount of $64,896. Massachusetts ranked first in the study with maximum annualized amount of unemployment paying $73,996, while Mississippi ranked last in the study with annualized amount of unemployment totaling $43,420.

It’s been a theme of sorts in my writing to say that policymakers in financial crises arbitrarily pick winners and losers, and this is a prime example. They create high levels of moral hazard (when people’s actions are divorced from the consequences, usually by passing financial risk on to a third party) and often reward people for increasing costs to taxpayers rather than mitigating lost economic value.

Unemployment benefits exceeding 100% of original salary are only one example of a lot of nutso provisions in the stimulus legislation. This is one that is likely going to prolong our economic problems though.

And of course, that’s assuming that Democratic lawmakers do not attempt to extend these enhanced benefits once they expire, and you know there is a 100% chance they will.

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