Would you accept a job that was going to pay you less than what you could earn from collecting unemployment insurance? Many Americans have been facing this scenario as economies re-open from the COVID-19 lockdowns.
Due to supplemental federal unemployment insurance benefits that began with the CARES Act rescue legislation in 2020, individuals can collect more money from unemployment insurance than they could from some lower-wage-paying jobs.
Some believe that this disincentive is responsible for the persistent levels of unemployment across the country, despite companies desperate to hire. Because of this, many states have moved to end the federally provided benefits ahead of schedule. The hope is that ending the programs will encourage people to return to work. However, now that is facing both practical and legal challenges.
More for nothing?
Many people collect more money through unemployment insurance than they could if they were to return to their old job. But how is that possible?
Typically, unemployment insurance pays approximately 50% of a worker’s previous salary (in Indiana, it is 47%), ensuring little incentive to not return to work. However, in the early days of the pandemic, Congress implemented an additional $600 weekly benefit on top of the state-provided insurance.
As a result, for many (especially lower-wage earners), the combined amount of benefit exceeded what they were previously earning. While the extra benefit has been reduced recently to only $300 per week, University of Chicago economist Peter Ganong estimated that 42% of people receiving the supplemental benefit are still earning more than their previous job paid.
A Disincentive to Work?
While higher incomes may benefit the individual, what impact has this policy had on businesses and the economy? Many companies that offer low-wage positions have been struggling to fill vacancies and attribute this problem to the federal unemployment insurance.
There may be something to that, as the number of unemployed has remained stubbornly flat for the past several months and possibly constraining what would be an even more robust economic recovery. When the supplemental benefit was reduced from $600 per week to $300 per week, there was a related decrease in the unemployment rate. This might suggest that the disincentive to accept a job for some workers had decreased.
A Federal Reserve Bank of San Francisco study found that the reduced $300 benefit has a “small but likely noticeable” impact on the job market. According to the findings, the supplemental benefit discourages one in seven would-be job takers from reentering the workforce. If these workers were to return to the labor force, that could positively impact economic growth.
However, some argue that other factors are preventing the unemployment rate from continuing to decline. For instance, ongoing concerns about Covid and its risks may be dissuading some from returning to the workforce. Additionally, finding suitable childcare poses a challenge for families since many daycare facilities are not back to operating at full capacity and schools are out for the summer.
Legal Battles Ahead
Even though the supplemental federal unemployment insurance is set to expire on September 6, many states are taking steps to end the benefits now in hopes that it will provide a bump to their economies. Twenty-five states, including Indiana, recently decided to end their participation in the federal program. In those states, continuing claims for unemployment benefits fell 17.8% from May 1 to June 12, while only decreasing 12.6% in states maintaining the policy. Lower levels of unemployment should be a tailwind for continued economic growth.
However, the decision to stop paying the supplemental benefits has been met with resistance and legal challenges. After Governor Holcomb ordered the state to stop providing the federal unemployment benefits, just last week, a Marion County judge issued an emergency injunction forcing the state to continue paying benefits until a court case challenging the order is adjudicated.
Even though the pandemic (at least presently) is subsiding, the impact from the unprecedented scale and reach of federal programs and interventions is still with us. The long-term impact remains unclear. However, barring an extension of the federal unemployment insurance program from Congress, these benefits will expire in just a few months and could provide a tailwind for employment and growth.
Jonathan Koop, CFA, is a Senior Portfolio Manager with Bedel Financial Consulting Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.bedelfinancial.com or email Jonathan at email@example.com