If you listen to the talking heads on TV (or your crazy uncle on Facebook), you’ll probably hear arguments either for or against unemployment benefits that boil down to some version of the following:
The unemployed are losers and slackers, taking all of the tax money that people with a job are being forced to send to the government.
The unemployed are being given the bare minimum (or less) to keep their bellies full while they desperately search for new job
As always, the truth lies somewhere in the middle.
To find that truth, we need to answer the following questions.
- What were the original goals of the unemployment insurance program?
- What assistance is available?
- What have been the historical impacts of unemployment benefits?
- What effect have the current pandemic-induced benefits had on the unemployed?
History of Unemployment Benefits
Like many of our most important social programs, unemployment insurance began during the Great Depression as part of the New Deal, specifically Title III of the Social Security Act of 1935.
Prior to this legislation, the main backstop against income loss due to unemployment was a patchwork of individual union plans, which had started as early as 1831.
However, by 1934, during the depths of the Depression, not even 100,000 union members were covered by these plans. With the unemployment rate that year at 21.7%, millions of men, women, and children were completely without means to support themselves.
The realization that US citizens were literally dying from hunger was a primary driver of the legislation.
The fundamental case for unemployment protection lies in the fact that under a democratic form of society we are forced to prevent any large-scale starvation.
Funds must be provided somehow . . . It is practical sense to build a system which will gather the funds in good times and disburse them in bad times.
This simple theory underlies all formal proposals for unemployment insurance, for unemployment reserves.
- Stanley King in American Labor Legislation Review (December 1933) (emphasis added)
By the time that the federal and state systems were up and running in 1938, 20 million workers were covered by unemployment insurance, which was just under two-thirds of the total workforce.
Combined with the other New Deal programs, unemployment benefits helped stave off the worst effects of the Great Depression and probably saved millions of lives.
Unemployment insurance was created during the Great Depression, which was followed by World War II, so there was very little pushback to the program until things quieted down during the 1950’s.
By that time, the post-war economy was starting to kick into high gear, and some people were questioning the validity of a program that wasn’t being used all that much anymore.
To help measure the success of unemployment insurance, the government needed more formalized goals outside of “keep people from starving”. So, in 1955, on the program’s 20th anniversary, the Secretary of Labor established the following objectives:
Unemployment insurance is intended to three things.
- Offer workers income maintenance during periods of unemployment due to lack of work, providing partial wage replacement as a matter of right.
- Help maintain purchasing power and to stabilize the economy.
- Help prevent dispersal of the employer’s trained labor force, the sacrifice of skills, and the breakdown of labor standards during temporary unemployment.
To achieve those goals, the program uses three different categories of benefits
- Eligibility: Who gets the benefits?
- Replacement Rate: What do they get?
- Duration: How long do they get it?
Review of Current Benefits
Since the unemployment safety net starts with the states, you are going to get 50 different programs with varying combinations of the categories above. So let’s dive right in.
Not everyone who has a job is eligible to receive unemployment. Most state programs have some combination of the following requirements.
- Income earned / hours worked
- Reason for leaving
- Looking for employment
Here in Indiana, the specific requirements are:
- Income earned: During the first 4 of the last 5 quarters (base period), you must have wages of at least $4,200 of which $2,500 must be in the last 6 months of the base period. (Is this confusing enough?)
- Reason for leaving: You only qualify for Unemployment Insurance benefits if you are unemployed through no fault of your own. (There are very few case-by-case exceptions for quitting or being fired.)
- Looking for employment: You are able, available, and actively seeking full-time work.
The percentage of unemployed persons who are eligible for benefits is known as the recipiency rate. Unfortunately, some states have an extremely low recipiency rate, which is disastrous for those in need of help.
For example, only 29% of all unemployed Americans received state benefits in March 2020.
When talking about unemployment benefits, most everyone seems concerned about the total dollar amount that is allotted. The cost of living across the states results in a wide variety of benefit amounts, with the Northeast and Pacific Northwest seeing some of the highest weekly benefits.
But that doesn’t tell the whole story. A better measure is the replacement rate, which is the amount of your prior salary that your unemployment benefits cover.
One long accepted goal of the program has been to provide a benefit/wage-replacement rate of 50 percent to the great majority of unemployment insurance beneficiaries. Almost all the statutory formulas call for this level of benefits.
Unfortunately, in 2019, the Unites States only supplied 39% of the average worker’s income.
To put this in context, the maximum weekly unemployment benefit in Indiana is $390. That is 36% of the median state income, which is slightly worse than the national average.
Now that we know who is eligible and how much money they get, the last item to address is how long the benefits are paid out, or the duration.
The standard duration for unemployment benefits for most states is 26 weeks. 10 states had shorter limits, while two had longer ones (Montana and Massachusetts).
However, just because the duration of benefits is 26 weeks does not mean that you will get benefits for 26 weeks. There is a requirement that you actively search for a job and accept an offer if one is presented. The specifics vary across states.
In Indiana, you need to complete three “work search activities” every week and submit a record to the Department of Workforce Development. Activities include not only applying to jobs, but also creating your resume and cover letter, creating a LinkedIn profile, and attending a (now virtual) hiring event.
Impact of Unemployment Insurance
Research into the effect of unemployment benefits has been going on since the 1950’s, with some of the most compelling results emerging in the late 1970’s.
There is an argument that unemployment benefits cause people to quit jobs on a whim and just mooch off the government, thereby bloating the unemployment rate.
That was found to be untrue.
Although the study demonstrates that the existing system causes a perceptible, but small, amount of unemployment in the United States — between 0.2 and 0.3 percent of the labor force — that is not a figure that supports the notion of armies of unemployed malingerers and chiselers. — The Impact of Unemployment Insurance on Job Search (1975)
Okay, so maybe there isn’t a horde of people sucking down government money, but those few who do are probably on the dole for as long as possible, right?
The effect of unemployment insurance on duration is small. — Direct Labor Market Effects of Unemployment Insurance (1977)
And even when people are on unemployment for a bit longer than average, it’s normally because the economy as gone to hell.
Extended time of benefit has a positive [e.g. prolonged] impact on unemployed time, but most of these studies happens during recessions, where jobs are already harder to find. — Extended benefits and the duration of UI spells: evidence from the New Jersey extended benefit program (2000)
The Great Recession gave economic researchers a veritable gold mine of unemployment data, and they took full advantage. Here are some highlights.
- Unemployment benefits prevent dependence upon other social safety nets (welfare and food stamps) by keeping people in the workforce.
[Unemployment Insurance] appears to support and encourage active job search among people who would otherwise drop out of the labor force. — Unemployment Insurance and Job Search Activity: Evidence from Random Audits (2012)
- The temptation to milk benefits is real, and some people do take advantage, but the cost/benefit ratio to the states is pretty good.
Although most economists would agree that [Unemployment Compensation] benefits create some disincentives to find work quickly, these disincentives are somewhat balanced by a relatively low replacement rate of wages by UC benefits and a recognition that proper allocation of human resources and human capital requires adequate job search time. — Extending Unemployment Compensation Benefits During Recessions (2014)
- Overall, there is no proof that unemployment benefits create a nation of “takers”.
We found no association between benefit availability and employment or labor force participation at the time of the survey. — Additional Unemployment Compensation Benefits During the Great Recession: Recipients and Their Post-Claim Outcomes (2016)
And straight from Congress comes the following gem about those on unemployment.
Claims that extended UI benefits deter unemployed workers from looking for work are unfounded. On the contrary, beneficiaries of federal UI benefits have spent more time searching for work than those who were ineligible for UI benefits. — The Case for Maintaining Unemployment Insurance: Supporting Workers and Strengthening the Economy; U.S. Congress Joint Economic Committee (2011)
Explanation of Enhanced Benefits
Now that we know that “regular” unemployment benefits have an overall positive impact on employment and the economy, we can begin dissecting the impact of “enhanced benefits” and whether they incentive people to stay unemployed and collecting all that extra money.
Historically, the federal response to an economic crisis usually consists of merely increasing the duration of unemployment benefits. The government does this by directly funding the states, which in turn keep paying the same amount of benefits to the unemployed.
However, in response to the pandemic-induced lockdowns and resulting in mass layoffs, the federal government increased unemployment benefits in all three categories.
- The pool of eligible workers was expanded by including gig workers, independent contractors, and the self-employed.
- The weekly amount paid to the unemployed was increased by $600 until July 31.
- Unemployment benefits were extended up to 26 weeks.
The idea was that the lockdown and subsequent “careful reopening” of the economy would almost eradicate any transmission of the virus, with everything going back to almost normal.
As we know by now, that didn’t happen.
What we also want to know is how the unemployed reacted to the enhanced benefits, especially in a pandemic. So, let’s take a look at what the overall impact of the enhanced benefits, and if they were a detriment to the labor force.
As mentioned above, the federal government finally included non-traditional employment to qualify for unemployment benefits. Given the shift to the gig economy in the recent past, the impact of this decision was enormous, as recipiency rates were near historic lows just prior to the pandemic.
By mid-May, “nearly 11 million who would have received no benefits at all” were on unemployment rolls. That’s 11 million people who might otherwise have gone without food, missed a rent payment, or had their electricity cut off.
Not only were more people eligible to receive benefits, the subsequent job search requirements were widely suspended by the states after the federal government gave them “significant discretion” to temporarily change or suspend job search requirements.
By April 30, “at least 39 states and Washington D.C. had waived the rule about searching for work to some degree.”
However, as the summer wore on, those job search requirements started showing back up in several states.
This might be the biggest news maker of the three, as the federal government added a flat $600 to every single weekly unemployment check, regardless of any calculated state unemployment benefits.
(BTW, that extra amount equals $15/hour, which is ironic given the resistance to the Fight for $15 and insistence on a $7.25 minimum wage.)
Regardless, the extra money vastly increased the replacement rate, sometimes significantly above the lost wages. In fact, “(t)he average worker in more than half of states stands to collect more from unemployment than from their prior job.”
For example, food service workers might have received 180% of their income from the enhanced benefits, while IT personnel only saw 60% replacement.
The simple formula was also a way to deliver the money in the fastest possible way to those most in need of it.
The beefed-up unemployment benefits [were] also an issue of expediency. State unemployment systems are clunky and outdated even in the best of times, economists said. Instating a more-complicated formula would have delayed benefits for months — a potentially devastating outcome for families in dire straits,
On top of the average 26 weeks, the government agreed to fund unemployment benefits for much longer; allowing 13 extra weeks for everyone, and an additional 13 weeks for those in state with high unemployment.
While a maximum of 52 weeks, or one full year, may seem like a lot of time to find a job, it might not actually be that much. Millions could be at risk of completely losing their benefits, both federal and state, before the pandemic and recession are over.
Now we that we covered the specifics of the current benefits, we have to ask the $64,000 question.
Do Enhanced Benefits Incentivize Unemployment?
Once the initial lockdown ended and business started opening up, there was a lot of worry about enticing people back to work at wages that were much lower than their unemployment benefits.
The May edition of the Federal Reserve’s Beige Book included several reports of business unable to find employees, citing the $600/week of federal benefits as a primary cause, along with childcare concerns and overall fear of infection
From the overall summary:
Contacts cited challenges in bringing employees back to work, including workers’ health concerns, limited access to childcare, and generous unemployment insurance benefits.
From the New York District,
A number of these firms noted that [recalling workers] has been challenging, with many unemployed workers reluctant to return to work — some attributed this to generous unemployment benefits, as well as safety concerns.
…the Philadelphia District,
When asked about impediments to recalling workers, 33 percent of the firms noted fear of infection and 25 percent noted lack of childcare; overcoming the lure of expanded unemployment benefits was noted by 29 percent of the firms.
…and the Cleveland District:
Multiple contacts in a variety of industries noted additional labor market challenges, including limited access to childcare services keeping workers away from job sites, workers’ requesting to stay home out of fear of the virus, and unemployment benefits that disincentivized workers from rejoining payrolls.
These stories seem to paint enhanced unemployment benefits as bad for business and a crutch for laziness. However, the benefits were never intended to be permanent, not even last for the entire year.
The goal was to prevent hunger and homelessness among those who had lost their job due to the shutdown, as well as to keep incentive staying at home while flattening the curve.
At least for now.
- Food pantries were initially overwhelmed, but demand dwindled once the states initiated the federal benefits.
- Mortgage and rental delinquencies, while elevated, did not approach the catastrophic levels that so many feared.
- People were able to stay at home and reduce the infection rate.
Not only that, but the overall economy was saved due to the extra benefits.
It is so clear from the data we have in hand and from the research that’s being done, that $600 [helped] prop up the entire economy,
— Claudia Sahm, the Director of Macroeconomic Policy at the Washington Center for Equitable Growth
In fact, recipients of the $600/week actually increased their spending by 10%, as opposed by those who were still employed, whose spending dropped 20%.
Not only did spending increase, but credit card debt decreased by $82 billion, as the unemployed started paying down their credit card bills in anticipation of the end of enhanced benefits.
All this is great, but it also points to the fact that maybe people wanted to be on unemployment, since it delivered so much value.
Come to find out, that’s not the case.
There have been five major studies on the pandemic-induced enhanced unemployment benefits, and they all basically say the same thing: the unemployed want to work, regardless of benefit level.
- No evidence.
We find 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. — Employment Effects of Unemployment Insurance Generosity During the Pandemic (i.e. the Yale study)
- No evidence.
We find no evidence that high UI replacement rates drove job losses or slowed rehiring. — Measuring the Labor Market at the Onset of the COVID-19 Crisis
- Applicants are available.
Overall, our evidence suggests that employers did not experience greater difficulty finding applicants for their vacancies after the CARES Act, despite the large increase in unemployment benefits. — Job Search, Job Posting and Unemployment Insurance During the COVID-19 Crisis
- No discernible impact.
Overall, the weight of evidence seems to suggest that to date, the FPUC — which was very successful in raising consumption among low-income families — did not have a discernible impact on employment through late July 2020. — The Impact of the Federal Pandemic Unemployment Compensation on Employment: Evidence from the Household Pulse Survey (Preliminary)
- No evidence.
The bottom line was that I found no evidence of any effect on labor market flows from more generous UI in May and June, controlling for other demographic factors. — Ernie Tedeschi, former US Treasury economist
Given all this evidence, we are left to conclude that unemployment benefits are an overall boon to the economy, even at the elevated pandemic levels. Additionally, the benefits allow the unemployed leeway to find a new job, a desire which has been evidenced since the program was started 85 years ago.
But aside from the financial benefit, there is also the moral burden for providing help to those who most need it, knowing that the cost must be paid by someone.
The cost of security for millions of workmen is not only very small.
It is not a new cost.
Like the price of many other things, we are paying it now without knowing it.
It is not an additional cost of doing the business of the Nation; it is partial recognition that the real responsibility for unemployment is not personal but social.
Somebody is paying right now for unemployment and must continue to pay.
This cost is currently being borne by individuals and companies alike across the country.
- Economists are forecasting an eviction crisis of biblical proportions, with up to 40 million at risk of homelessness.
- The economy is expected to fall off a cliff without the purchasing power of the extended benefits, as the unemployment rate is still worse than the peak of the Great Recession.
- Millions of workers, mostly women, are leaving the workforce to care for their children due to virtual school and the high cost of childcare. This break in employment will sap their skills and reduce their chances of re-employment.
If you notice, these results break all three objectives of the unemployment program detailed at the beginning of this article.
The unemployed don’t want to be unemployed. They didn’t ask to be a case study. They don’t want a handout.
They just want to provide for themselves and their family.
But while we are still in the middle of both a virulent pandemic and a horrible recession where jobs are at a premium, it is our moral, ethical, and economically responsible duty to provide for our citizenry.
The cost of letting a large portion of the workforce (and their families) slide into abject poverty while simultaneously letting our economy slip further and further into the abyss will be far greater than even the largest stimulus bill that is currently being discussed.
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