Michael Linden is the executive director of the Groundwork Collaborative and a fellow at the Roosevelt Institute. The opinions expressed in this commentary are his own.
Earlier this week, Senate Republicans unveiled their stimulus proposal to help Americans who continue to suffer from the economic effects of the coronavirus pandemic. Included in the $1 trillion package is a proposal to cut the $600 weekly boost to unemployment insurance benefits, which is about to expire, to $200 per week for the next two months. Then, beginning in October, the unemployed would receive a payment that would replace 70% of their lost wages when combined with their state benefit. Those payments would continue through the end of the year.
Conservatives in the Trump administration and in Congress say the current unemployment insurance benefit is too generous, and may even be discouraging people from going back to work. It is true that for many people who have lost their jobs, their unemployment benefits are, thanks to the $600 boost, greater than their wages were while they were employed, according to a working paper from the Becker Friedman Institute. And it’s easy to see how it might feel wrong to have unemployment insurance benefits replace 100% or more of a worker’s previous wages. But a focus on the replacement rate — how much of workers’ previous income is covered by their unemployment benefits — reinforces counterproductive, damaging ideas about how the economy and the labor market actually work and how to improve them.
The higher unemployment insurance benefit doesn’t mean workers are preferring to stay unemployed rather than take a job. Former Department of the Treasury economist, Ernie Tedeschi, used data from the Current Population Survey from the US Census Bureau and the US Bureau of Labor Statistics to examine workers who gained and lost jobs over the last two months. He analyzed this data with simulations of state unemployment insurance benefits and wage replacement rates compiled in a working paper from the National Bureau of Economic Research. He found no effect of higher unemployment insurance wage replacement rates on job finding or job leaving.
Another study from a team of researchers at Yale University examined data from Homebase, a private firm that provides scheduling and time clock software to small businesses, and came to the same conclusion, finding “no evidence that more generous benefits disincentivized work.” The Homebase data consisted of hourly workers, more than half of whom are in the food and beverage industry.
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The results of these studies may seem counter-intuitive. After all, if the income that someone gets while unemployed really is higher than the wages that they would be making at their job, how could that not discourage people from working? Well, there are several reasons why this intuition is wrong.
It’s important to note that under many state unemployment insurance systems, a recipient could lose their benefits entirely if they “refuse an offer of suitable work.”
But even if you think that rules like these are lightly enforced or can be easily evaded, especially with the new eligibility requirements in the CARES Act, there remain a number of reasons why unemployment insurance benefits that replace 100% or more of one’s wages aren’t stopping people from working. For one thing, wages are often only one part of worker compensation.
In many jobs, non-wage benefits (health insurance, retirement benefits and paid time off) can make up as much as 30% to 40% of a worker’s total compensation. According to a Kaiser Family Foundation report published in May, about 5.7 million unemployed people who lost their employer-based health insurance since the start of the pandemic will still have to cover the full cost for their own health coverage. Unemployment insurance benefits that replace 100% or more of someone’s wages do not replace those benefits.
What’s more, people know that a temporary unemployment benefit isn’t the same as a permanent job. I’m sure few people would pass up the relative stability of a job for an unemployment insurance benefit with an uncertain future, even if that benefit is higher than normal. This is especially true in recessions, when jobs are scarce. And it might be even more of a factor in this recession, when there’s extra uncertainty about the future of the economy and the job market.
What’s preventing people from going back to work is that there aren’t enough jobs. In May there were almost four job seekers for every open position, when just six months ago, that ratio was 0.8 to one. What’s preventing people from going back to work is that some work is still unsafe, as Covid-19 cases continue to rise around the nation.
What’s preventing people from going back to work is a lack of child care and the inability of schools to reopen safely. Parents can’t head off to work leaving their children unattended. If the White House and the Senate were to address the need for expanded testing, medical equipment and public health protocols across the nation, maybe then we could talk about getting people back to work.
The bottom line is that the single-minded focus on the replacement rate is misplaced. It may seem intuitive, but it’s a red herring. Policymakers should worry less about that and more about keeping families safe and the economy afloat.
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