Data Suggest That Elevated Unemployment Benefits Cause People To Stay Fat, Happy and at Home

 Ryan Bourne and Erin Partin in a recent article point to data that show the not surprising fact that if you pay people more to stay at home than work, they will stay at home and not work:

Last week’s job market numbers were strong. The unemployment rate fell to 6.0 percent – the lowest since the start of the COVID-19 pandemic – and total nonfarm payroll employment rose by 916,000 in March. But signs already suggest that the employment bounce-back is being restrained from its full potential by Congress’s decision to entrench a $300 weekly unemployment benefit supplement through September.

Combined with state unemployment benefits, around 37 percent of workers can currently make more unemployed than in work. A low-income worker in Massachusetts previously earning $535 per week faced a pre-pandemic replacement rate of unemployment insurance benefits to earnings of 48 percent ($257). Now, the same worker would obtain benefits worth 104 percent of their pre-recession earnings ($557).

In New Mexico, someone previously earning $342 per week would see a replacement rate of 141 percent from the expanded benefits ($483). The disincentive to work this creates reduces the labor supply, raising market wages but by squeezing employment levels as fewer workers make themselves available for job opportunities that are economic to offer for businesses...

1. Daniel Zhao, a senior economist at Glassdoor, reports that job search activity on Google fell by 15 percent in early March, with the decline starting just before the American Rescue Plan passed that extended elevated unemployment benefits. The search activity rate remains 10 percent down even now—a trend not observed in 2019, which cannot be explained by COVID prevalence across states, and which we wouldn’t expect as the economy reopens and job opportunities expand (see figure).

 

2. Contacts to regional Federal Reserve Banks report issues with unemployment benefits deterring job re-entry, according to the most recent Beige Book. The Chicago Fed says “Several contacts expressed concern that unemployment benefits were putting a damper on worker availability.”

   The St. Louis Fed: “Contacts noted stagnant or declining employment, especially among small businesses and leisure and hospitality firms, with continuing closures in a slower-than-expected recovery. Transportation and manufacturing firms reported their desire to expand their workforce has been stymied by a scarcity of workers. Many contacts ascribed this scarcity to unemployment benefits and other government aid.”

   The Minneapolis Fed: “Despite increased job openings, labor supply constraints contributed to a continued disconnect between workers and opportunities… Some contacts said the prospective continuation of enhanced unemployment benefits created a disincentive to return to work.”

3. Daily, one runs into stories of businesses struggling to hire new workers. But this now extends far beyond anecdote. The National Federation of Independent Business in March reported a record-high share of 42 percent of small businesses surveyed who said they couldn’t fill a job opening—much higher than the average figure of 22 percent since 1974, despite elevated unemployment. A massive 91 percent of respondents said they had few or no qualified applicants for job openings in the past three months, one of the highest values since that question was surveyed.

In some cases, this will mean businesses will raise wages which will result in higher prices for consumer goods and services. In other cases, it will result in businesses cutting back on supply of goods and services, resulting in supply bottlenecks and higher prices.

The work disincentives in the American Rescue Plan is a bizarre framework that sets up a unique form of stagflation where prices climb, the stock market climbs and unemployment remains high.

 -RW