In the final hours leading up to the $2 trillion coronavirus stimulus bill passing the U.S. Senate, Republicans warned that an unemployment provision could create a perverse incentive. In many cases, the CARES Act would pay workers more on unemployment than they made when they had jobs, thus incentivizing people not to return to work. Sen. Chuck Schumer (D-N.Y.) celebrated the provision and Sen. Bernie Sanders (I-Vt.) dismissed the Republicans’ concerns as “anti-worker,” threatening to block the bill if this unemployment provision was revised. Yet a recent study confirms what recent news accounts suggested: the measure is dangerous for the economy.
A Heritage Foundation study released Wednesday estimates that the extra $600 per week in unemployment will cause 13.9 million more people to file unemployment claims and reduce GDP by between $955 billion and $1.49 trillion.
“Congress’s creation of an additional $600 per week in unemployment insurance benefits allows a majority of Americans to earn more from unemployment than employment. Economic studies show that higher unemployment benefits translate into higher levels of unemployment claims and longer durations of unemployment, which translate into lost goods and services,” Heritage research fellows Drew Gonshorowski and Rachel Greszler write. “To prevent unnecessary losses and to allow the economy to recover more quickly, policymakers should cap unemployment benefits at no more than 100 percent of workers’ wages and tighten eligibility requirements for claiming benefits to prevent misuse and abuse.”
When Sen. Ben Sasse (R-Neb.) and other Republicans raised these concerns, liberal naysayers like The New York Times‘s Binjamin Appelbaum insisted that the program could not be abused because “YOU CAN’T GET UNEMPLOYMENT BENEFITS BY LEAVING YOUR JOB VOLUNTARILY.”
This complaint misses the point. The problem is less that workers will choose unemployment over employment and more that employers will feel more at ease about furloughing employees, and that employees will have an incentive not to return to work when opportunities arise.
The Heritage report noted that in the four weeks since Congress passed the CARES Act, initial unemployment claims have surged by almost 6 million per week. It is impossible to parse out exactly how much of this was a direct result of the extra $600 per week in unemployment, but some employers appear to have been far more comfortable furloughing employees due to the provision.
A Nissan plant in Canton, Miss., temporarily laid off about 4,000 employees during the week of April 6. The plant had been paying employees their full salaries despite a production shutdown, but it appears the CARES Act changed the company’s mind. “The enhanced benefits through the CARES Act—that gave us some solace in terms of making that decision,” a Nissan spokesperson said.
Jamie Black-Lewis, who owns two salons in Washington State, had to suspend pay for 35 employees, including herself, when the state government ordered non-essential businesses to suspend operations to stop the spread of the coronavirus. She applied for small business loans through the Paycheck Protection Program and received $177,000 and $43,800 — on the conditions that the bulk of the funds must go toward payroll, that salaries must remain intact, and that employee headcount must not decrease.
Yet when Black-Lewis told her employees the good news that she would pay them even without them returning to work, they got angry. “It was a firestorm of hatred about the situation,” the small-business owner told CNBC. Her employees discovered they would make more money on unemployment, so receiving their old paychecks would actually amount to a pay cut.
“It’s a windfall they see coming,” Black-Lewis said of the extra unemployment payments. “In their mind, I took it away. I couldn’t believe it. On what planet am I competing with unemployment?”
Kurt Huffman, owner of the restaurant ChefStable, took to The Wall Street Journal to explain the practical effect of the extra $600/week in unemployment.
“The starting wage for a line cook in one of our restaurants is $15 an hour. These cooks receive at least $1 an hour in tips, so at a minimum they make $16 an hour, or $640 before taxes for a 40-hour week. The overwhelming majority of our laid-off cooks qualified for Oregon unemployment compensation of 1.25% of their annual gross wages weekly, or $416 in our example. The extra $224 a week provides a strong incentive to return to work,” Huffman explained.
“But as of this week, that same employee receives $1,016 a week, or $376 more than he made as a full time employee. Why on earth would he want to come back to work?”
“This has had the perverse effect of making it impossible for us to hire enough people even for our limited takeout and delivery business at a time of rapidly rising unemployment,” Huffman reported. “It will be an even bigger problem once we are allowed to reopen our dining rooms. And it will persist at least until July 31, when the unemployment bonus expires. I’d have to offer my cooks $25.40 an hour to match what the government is paying them not to work.”
In other words, the extra unemployment benefit forces employers to pony up more cash to get workers to return to work — right when the economy desperately needs a shot in the arm.
Ironically, this unemployment cash also frustrates key aspects of the CARES Act intended to help jumpstart the economy.
Thanks to Bernie Sanders, roughly 13.9 million more people will end up on unemployment — sucking money from a government already deeply in debt and not contributing to any economic recovery, costing the economy roughly $1 trillion. That loss of productivity will also translate to lower revenue in taxes, making it harder for the government to pay off the massive debt it is incurring during the crisis.
Tyler O’Neil is the author of Making Hate Pay: The Corruption of the Southern Poverty Law Center. Follow him on Twitter at @Tyler2ONeil.
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