Is Unemployment Bonus Keeping Workers on Sideline?
By Robert Farley
Posted on June 1, 2021
Despite a stubbornly high unemployment rate of 6.1% in April — representing 9.8 million people who say they are actively looking for work — many employers are reporting that they can’t find people to hire.
Republicans say the $300 a week supplement to unemployment insurance, which for many Americans amounts to a pay raise, is so generous that it is acting as a disincentive for people to return to work.
President Joe Biden, meanwhile, dismisses that suggestion, saying on May 10, “we don’t see much evidence of that.”
“Americans want to work,” Biden said. “I think the people who claim Americans won’t work even if they find a good and fair opportunity underestimate the American people.”
After the Bureau of Labor Statistics reported a disappointing gain of 266,000 jobs in April, a reporter asked Biden if the enhanced unemployment benefits were “diminishing a return to work in some categories.”
“No, nothing measurable,” Biden said on May 7.
Biden and others in his administration argue there are other bigger drivers of labor shortages — such as access to child care (made worse by remote schooling) and the fact that most people still were not vaccinated against COVID-19 when the April jobs surveys were performed.
Republicans say Biden is ignoring the obvious.
At a recent county tour stop in Iowa, Sen. Joni Ernst said she “heard from a number of small business owners that were very concerned about getting people back to work. They cannot find the help that they need.”
“So the president continues to say, ‘It’s not the enhanced unemployment benefits keeping people home,’ well, yes, folks, it is,” Ernst said on May 25. “And so, it is time to end the $300 extra each week that those unemployment recipients are receiving. If we can end that we can get people back to work.”
To date, at least 23 mostly Republican-led states have decided to prematurely cut off the extra UI payments this summer, most in June, three months before they are set to expire.
So who’s right? Is a too-generous UI supplement the major reason workers are not rejoining the workforce? Economists disagree on the answer.
The CARES Act passed early in the pandemic in March 2020 provided a $600 per week federal unemployment insurance supplement, in addition to normal state unemployment benefits. That expired in late July. In December, Congress passed another relief bill that included a $300 unemployment insurance benefit until mid-March.
The $1.9 trillion American Rescue Plan championed by Biden extended the $300 supplement from mid-March through Labor Day. (An alternative Republican plan would have extended those extra UI payments only through the end of June.)
At the beginning of May, there were about 16 million Americans collecting unemployment insurance payments.
There have been many anecdotal stories in the media about employers saying they’re having a hard time filling job vacancies, particularly in the restaurant industry, because of the enhanced unemployment benefit. But economists are divided on the issue.
In a recent survey conducted by the University of Chicago’s Initiative on Global Markets, 40 prominent economists were asked whether they agree with this statement: “The $300 supplement to weekly unemployment benefits available from now through September 6 constitutes a major disincentive to work for lower-wage workers.” Nearly half (49%) said it was “uncertain,” while 28% said they agree or strongly agree, and 16% said they disagree.
Here is a sampling of the responses:
“$300 of extra money per week is quite meaningful to a low wage worker. Certainly enough to affect decisions.” — Aaron Edlin, co-director of the Law and Economics Program at Berkeley Law.
“‘Major’ is probably too strong, but with COVID improving and labor demand rebounding, UI benefit levels matter more now than before.” — Joseph Altonji, economics professor at Yale.
“I go for ‘minor disincentive.’ More important are childcare responsibilities, fear of COVID in jobs with close personal contact.” — Barry Eichengreen, an economics professor at the University of California, Berkeley.
“I don’t think we know enough about it. Fears of getting Covid may be a more important factor.” — Oliver Hart, an economics professor at Harvard.
“There will be some adverse effect on employment, just not clear how much.” — Pete Klenow, an economics professor at Stanford.
“Anecdotal cases of benefit recipients declining work will abound, but the evidence is that the effect is not major.” — Larry Samuelson, an economics professor at Yale.
“Clearly a disincentive, but major? Compared with the effect of schools being closed?” — Richard Schmalensee, an emeritus professor of economics at Massachusetts Institute of Technology.
“‘Major’ is probably too strong, but it does permit some workers to search more/longer for better jobs.” — Christopher Udry, an economics professor at Northwestern.
Earlier this month, Democratic Sen. Ron Wyden, the chair of the Senate Finance Committee, said there had been “report after report indicating” it was “not accurate” that the benefits discouraged work, according to Politico. Wyden instead blamed factors such as a lack of child care and reduced public transit services for the labor supply shortage.
When we inquired about Wyden’s statement, his press office pointed, in part, to a July 14, 2020, Yale study of the initial $600 benefit (back when the unemployment rate was in double digits) that found “no evidence that more generous benefits disincentivized work either at the onset of the expansion or as firms looked to return to business over time.”
Research from the Federal Reserve Bank of San Francisco about the initial $600 bonus similarly concluded, “Evidence from recent labor market outcomes confirms that the supplemental payments had little or no adverse effect on job search.”
A study led by Ioana Marinescu, an assistant professor of economics at the University of Pennsylvania, found that the increase in benefits from April to June 2020 did not reduce employment, even though it did reduce the number of job applications a bit. At the time, jobs were unusually scarce.
Scarcity of Research on $300 Bonus
But things are different now.
“Now, there is an increase in the number of job postings, so it is possible that the reduction in applications caused by unemployment insurance contributes to reducing job finding,” Marinescu told us via email. “Because of higher unemployment benefits, employers may be getting fewer applications for each job than before the pandemic. However, no one has quantified this (for the current round of benefits), and we cannot tell how big the influence of unemployment insurance is on job finding relative to other factors such as concerns about health or lack of childcare. In this sense, Biden is correct to say ‘nothing measurable.’”
Indeed, according to Opportunity Insights’ TrackTheRecovery.org, job postings in the U.S. have increased 5.5% compared with January 2020, before the pandemic.
Despite an unemployment rate that remains stubbornly high, the 8.1 million job openings at the end of March outpaced hires by 2.1 million, according to the Bureau of Labor Statistics.
That gap between job openings and hires is the largest since the data became available in 2000. Pre-pandemic, in January 2020, job openings outpaced hires by nearly 1.2 million, so there was a gap then too, but not as large.
Calling for an end to the enhanced unemployment benefit, Republican Sen. Rob Portman said that “with vaccines widely available and a record number of job openings, there is no reason the federal government should be paying people not to work.”
University of Chicago economist Peter Ganong told the Wall Street Journal that the $300 UI supplement means that “42% of workers are making more than their pre-unemployment wage.”
Still, Ganong told PolitiFact.com, “There’s just not enough evidence to understand what’s going on right now.”
“While there is a good theoretical reason to think the UI enhancement might create a disincentive — it increases the value of being on UI a bit — the question is how big a factor this really is given all the other factors facing families,” Aaron Sojourner, an expert in labor economics at the University of Minnesota, told us. “We have good evidence that the UI supplement had little effect on job search in the heart of the pandemic and before vaccinations were available. It likely has more effect now but we just don’t have much evidence about the benefits in terms of encouraging work.”
Although there has been little research so far on the effect of the recent $300 bonus, economist Arindrajit Dube at the University of Massachusetts-Amherst extended a previous study of the UI supplements into March. He concluded, preliminarily, that the bonus wasn’t having much of an effect on labor shortages.
“Maybe an unemployed person spends several additional days unemployed because of the $300,” Dube told the New York Times. “But if it’s a problem, it takes care of itself. It’s nothing compared to the broader trajectory of the reopening, which swamps anything on the unemployment insurance front.”
“Demand and supply for labor are both rising quickly,” Sojourner told us. “There are more employers hiring, the virus is more contained, and excellent vaccines are becoming available, but only about 2 in 5 working-age Americans are now at least 2 weeks past their final vaccine dose. It’s just not clear how many unemployed folks are close enough to working that $300 will be a decisive factor.”
But as we said earlier, not all economists agree.
University of Chicago economist Casey Mulligan estimates that the $300 UI bonus is reducing employment by a couple million jobs.
“On top of the bonus is free health insurance that Biden has also awarded the unemployed,” Mulligan told us via email.
Other Factors Influencing Labor Shortages
The White House, meanwhile, argues too much is being made of the idea that workers are choosing to stay home primarily because the UI bonus is too generous.
“There are many factors that go into whether a person is taking a job. Right?” Cecilia Rouse, chair of the White House Council of Economic Advisers, said at a press briefing on May 14. “If they — if somebody is not fully vaccinated, if there’s still a lot of COVID in their area, if they have still child care constraints, there are many factors that this pandemic has caused that are going to play into people’s decision — ability to go back to work.”
Federal Reserve Governor Lael Brainard, who was appointed to the Fed board in 2014 by then-President Barack Obama, also cited lingering school closures and fear of exposure to the coronavirus as major hurdles to many people returning to work. While deaths are down dramatically as more Americans get vaccinated, COVID-19 was still causing nearly 2,000 deaths per week in early May.
“People do actually want to go back to work; they are willing to do that,” Brainard said on May 11.
Nonetheless, while Biden said he did not think the UI bonus was a “major factor” in people not returning to work, he emphasized: “We’re going to make it clear that anyone collecting unemployment who is offered a suitable job must take the job or lose their unemployment benefits. There are a few COVID-19-related exceptions so that people aren’t forced to choose between their basic safety and a paycheck, but, otherwise, that’s the law.”
An Economic Boost?
Biden and other White House officials say the UI supplement has not only helped struggling families, but has aided the economy as well.
“UI has served a very important role through this pandemic,” Rouse said. “It has allowed people to pay the rent, which we know is very important for the landlord; it’s allowed people to put food on the table, which is important for them and their families. And so, we stand behind that those are very important supports. They’re supports to help us bridge to the end of this pandemic.”
Sojourner, of the University of Minnesota, echoed those sentiments, saying “the harms of cutting the supplement are clear.”
“In the latest data, from March, there were about 8 million job openings, likely more now,” Sojourner told us. “But there are now about 16 million Americans and their families using UI right now after losing their jobs through no fault of their own. That $300 has important benefits to many families and individuals every week, in terms of their ability to secure housing, food, and health. Eliminating it and putting people on regular UI means they’re going to have incomes about half of their pre-layoff earnings. Millions of people will still not find a job and now they’re risking eviction, loss of a vehicle, and lack of nutrition.”
Marinescu, of the University of Pennsylvania, said it’s “important to note that unemployment benefits also stimulate consumption, which creates jobs, and this effect can counteract the effect on job applications. By stimulating consumption, unemployment benefits contribute to increasing job creation and ultimately employment.”
“This consumption effect is likely to be stronger now than last year because the economy is reopening and people have more opportunities to consume and lower concerns about infection,” Marinescu told us. “In that sense, employers should remember that while higher benefits may make workers less enthusiastic about taking their jobs, higher benefits also give them more customers. Therefore, my educated guess is that higher unemployment benefits are still on net a positive contribution to the economy, especially when considering their insurance effect, i.e. the fact that they help out people whose income would otherwise be much lower.”
Other economists say the effect of the unemployment boost likely varies by state, as states pay varying amounts in basic unemployment insurance and, of course, the cost of living differs dramatically state to state.
St. Louis Fed President James Bullard told Reuters that such differences likely mean the UI bonus may act as a stronger disincentive in some states.
The same $300 “incentivizes people very differently,” Bullard said, adding that the $300 UI supplement “is a factor,” but “not the only factor” keeping people from returning to the workforce.
The talking points from both Democrats and Republicans are simple and clear: One side argues the UI bonus isn’t the main reason for a labor supply shortage, while the other argues it is. But the issue is more complicated than either side suggests, and economists disagree on the impact.
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