Biden’s jobless checks may harm economy

At a time when the economy is growing rapidly again, the last thing Congress should do is make unemployment more financially rewarding than working.
Unfortunately, a part of President Joe Biden’s $1.9 trillion pandemic relief plan would do just that. The president proposes paying unemployed workers a $400 weekly supplement on top of other jobless benefits they receive. If adopted, the additional funds will have the perverse effect of hurting the labor market, leading to more joblessness.
Unemployed workers are typically eligible for around half of their previous weekly wages, up to a maximum amount. This strikes an appropriate balance. Unemployment compensation helps households continue to pay their bills, stretch out their consumption over time, take time to find a new job that matches their skills and experience, and support aggregate consumer spending. Yet the amount is not so generous that it causes a harmful increase in the length of joblessness.
The standard weekly benefit varies widely across states. Prior to the pandemic, Massachusetts and Hawaii each paid around $550 per week, on average. Alabama, Tennessee, Arizona, Louisiana and Mississippi paid an average of less than $250. The weekly average for the nation as a whole was $387.
When the pandemic struck last March, Congress added $600 to standard benefits, bringing the total amount an unemployed worker could receive in a week to an average of around $987. The goal of the $600 supplement was to replace (roughly) all the income people lost from being unemployed, rather than just the fraction of their income that standard benefits would replace.
This policy meant that the unemployed were much better positioned to meet all their expenses during a period of extraordinary uncertainty and significant anxiety. And the extra compensation gave a needed boost to the economy by supporting overall consumer spending, helping businesses to stay open and to keep their workers on the payroll.
Many economists would normally have been worried that fully replacing lost income would keep many people on the unemployment rolls and out of paid work. But the situation last spring was anything but normal. During the severe lockdowns of that time, one goal of the policy was to stop the unemployed from looking for work, because if they were handing out resumes and going on job interviews they risked spreading the virus.
During the spring lockdowns, the downside of unemployment compensation — that it encourages workers to remain jobless — was actually a strength. Moreover, with unemployment skyrocketing and labor demand collapsing, relatively few jobs were available.
The widespread expectation at the time was that lockdowns would last a couple months. The labour market began to recover in May, but it remained extremely weak for months. So it’s not surprising that economic research suggests that the $600 supplement did not reduce hiring or employment throughout the summer.
But just because the unusually generous unemployment benefit didn’t keep workers out of jobs in the early months of the pandemic does not mean that it wouldn’t in the summer and fall of 2021.
A large body of research finds that more generous compensation led to longer periods of joblessness. This evidence, and not what happened in the spring and summer of 2020, is a better guide to the current year.

—Bloomberg