Improve the Labor Market By Ending Federal Unemployment ‘Bonuses’

​The substantially weaker than expected U.S. jobs report was unfortunate for struggling Americans, but it should have been expected given the disastrous policy out of D.C. Fortunately, states can fix it.

Milton Friedman said that if the federal government oversaw the Sahara Desert, within five years there would be a shortage of sand. So inefficient and feckless is D.C. that we should never underestimate its ability to ruin good times and make bad times worse.

The 2020 recession and the current anemic recovery are a prime example.

State government-imposed shutdowns destroyed the greatest American economy in recent memory. Sure, the novel coronavirus played a role, but it was primarily imprudent policies which annihilated the best labor market in over half a century. On top of wounding that labor market so severely, the federal government then proceeded to poison the patient, ensuring a languid recovery.

The poison of choice? “Bonuses” for the unemployed.

At first glance, this hardly seems like an economic sedative. Why would it be harmful to help the unemployed? If anything, it sounds humane. The unemployed need assistance until they can find another job, and unemployment insurance (UI) payments partially or completely fills that temporary need, especially for those with little or no savings.

While that is true, new UI bonuses by the federal government haven’t been humane.

UI payments normally provide about half of what you earned while employed. However, in 2020—amid all the other decisions in D.C.—the federal government initiated a weekly bonus of $600 to everyone on unemployment. There were numerous reasons given for this enhancement, but they were all rather nebulous.

The actual effect was more people became unemployed and stayed unemployed.

Adding a weekly bonus to UI payments on top of what the unemployed already receive from the state frequently created the bizarre scenario wherein a person received more on unemployment than while working. Between April and July of 2020, 69% of those who lost their jobs had higher after-tax income on unemployment. (UI payments are not subject to Social Security tax, Medicare tax, nor income tax in some states.) Half of the unemployed were receiving at least 134% of what they earned while working.

If you are receiving more on unemployment than you did while working, why would you go back to your job? It’s one thing to expect people to be rational, but another to expect them to be saints.

Even after the $600 weekly bonus expired, D.C. instituted a $400 bonus, and now a $300 bonus. While the deleterious effects of the bonus have diminished with its size, the negative effect on unemployment is still potent. Some 6 million people are staying on unemployment because of all the government handouts they receive.

And although the businesses that didn’t fold during the lockdowns are finally able to reopen their doors with the lifting of government lockdowns in some states, those businesses are struggling to find people willing to work.

Unlike before the government shutdowns when the economy was roaring and businesses could not find enough workers because commerce was so busy, now businesses are contending with Uncle Sam’s generous handouts—an uphill battle to be sure.

There is now a chronic labor shortage of almost 7 million workers (and that number is rising) amidst massive unemployment. The incompetence of the federal government was worse than Milton Friedman predicted—in less than a year, it has produced this surreal and terrible scenario.

At least two states are telling D.C. that enough is enough. Montana Gov. Greg Gianforte will no longer accept the UI bonuses starting in June. And South Carolina Gov. Henry McMaster will do the same starting this week. However, these funds shouldn’t be used as a bonus to incentivize people to work as proposed in Montana, because nothing is free—whether it be handouts or precedence.

But regarding rejecting this federal expansion into the economic livelihood of Texas, Gov. Greg Abbott should do the same.

Texas currently has almost 1 million unemployed people—nearly twice the number from February 2020 before the pandemic—despite hundreds of thousands of unfilled job openings statewide. If the governor cancelled the federal unemployment bonuses, it would help alleviate this situation by removing the artificial incentive to remain unemployed.

This would not impact regular state-provided UI payments, so those who are truly struggling to find work will still receive those payments.

Opening the great state of Texas was the right decision, but it means little to businesses and economic prosperity if businesses are unable to find workers. Rolling back these injudicious UI bonuses will eliminate a reason for too many not to work and help Texas flourish once again while providing yet another model for the country.

https://www.texaspolicy.com/improve-the-labor-market-by-ending-federal-unemployment-bonuses/