Moneybox

Q: Are Generous Unemployment Benefits Destroying the Economy? A: No, of Course Not.

CAMBRIDGE, MASSACHUSETTS  - MARCH 23: A cashier wears gloves at Whole Foods on March 23, 2020 in Cambridge, Massachusetts. Massachusetts Governor Charlie Baker ordered all non-essential businesses to close by noon on March 24 in an attempt to stop the spread of COVID-19.  Grocery stores and pharmacies will remain open, and restaurants will still be able to sell food for take-out service. (Photo by Maddie Meyer/Getty Images)
If this clerk makes more money on unemployment insurance right now, so be it. Maddie Meyer/Getty Images

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One side effect of the generous unemployment benefits that Congress created in response to the coronavirus crisis is that some businesses seem to be having a bit of trouble rehiring the workers they laid off when everything first started going to hell. The government is currently paying people who have lost their jobs an extra $600 per week on top of whatever help they’d normally get from the state where they live. As a result, many Americans can now make more more money sitting at home than when they were actually working.

That has left some employers in a jam, and their concerns are getting more and more play in the media. NPR recently spotlighted a coffee shop owner who decided to close down mainly because her workers preferred to keep collecting unemployment than go back to pulling espresso shots. On the Wall Street Journal’s op-ed page, a restaurant operator in Portland complained that when his kitchens tried to rev back up to do takeout, none of the staff wanted to come back. (His current plan is to reopen in August, after the $600 benefit expires.) Convincing people to take a pay cut for the privilege of going to work during a pandemic isn’t exactly easy.

Conservatives have seized on these sorts of gripes as evidence that Washington’s unemployment scheme was a “blunder” that is “already undermining the economic recovery,” as the Wall Street Journal’s editorial board wrote earlier this week. Progressives, on the other hand, have written them off as the wails of petty capitalists who never paid their workers enough to begin with. (Media Matters accused NPR of recycling “right wing talking points.”)

I’d argue that both sides are wrong. The jobless benefits Congress created are obviously not “undermining” the broad economy right now; rather, they’re helping prop it up while saving millions of Americans who’ve been laid off from unnecessary hardship and while serving an important public-health purpose. But they do create a real dilemma for some small businesses owners, especially ones who are trying to get their own government aid.

It’s important to realize that the $600 unemployment insurance benefit wasn’t anybody’s ideal policy option. It was a creative workaround. When Congress was negotiating over the CARES Act in March, Democrats wanted to bulk up unemployment so that it would replace 100 percent of a worker’s old earnings for the length of the crisis. But lawmakers quickly discovered that the archaic computer systems that states relied on to administer unemployment weren’t nimble enough to easily do that for each applicant. It was much simpler to tack a flat payment onto everybody’s weekly allowance. They landed on $600 because, added to state benefits, it would have been enough to cover the average unemployment recipient’s full wages in 2019. But many workers are actually getting more than what they earned on the job.

For the most part, that’s a good thing. In the past five weeks, 26 million people have filed for unemployment benefits—not because they are luxurious, but because states and cities have ordered entire industries closed, and other businesses have seen their sales slow to a crawl. Making sure those people have enough money to support themselves will prevent untold amounts of needless suffering and buoy consumer spending, which should keep the economy from sinking even deeper into economic distress. These benefits are providing financial life support to families and our GDP. If anything, the main problem with them so far is that overwhelmed state unemployment systems were slow to start rolling the payments out.

Paying people to stay home also makes sense from a public-health perspective at the moment. Most experts agree that the outbreak is still severe enough that the United States is not ready to return to normal yet—even Donald Trump has criticized Georgia for trying to reopen certain businesses far too soon. Incentivizing people to keep social distancing, rather than take jobs out of financial necessity, is literally healthy for everyone.

But with all of that said, the deluxe unemployment benefits have clear drawbacks. Above all, they make it difficult for some business owners to take advantage of the Paycheck Protection Program, the government’s main rescue effort for small and mid-sized businesses. PPP was designed to keep firms open so that they would continue paying their people rather than dump them onto the unemployment rolls. As part of the deal, it essentially requires employers to rehire workers who’ve been laid off and spend 75 percent of their aid money on payroll. That’s difficult to do when your former staff know they can make more from UI. Not impossible—there are plenty of restaurants still serving takeout right now. But harder. (The $600 payment alone is the equivalent of a $15 hourly wage; with state benefits thrown in, many workers are now making more than $20 an hour.)

In theory, an especially vindictive restauranteur could try to force his line cooks to strap their aprons back on and start frying, since people can lose their unemployment benefits if the government finds out they turned down a job. But many owners don’t want to rat out their former staff. As one business owner in Maine told the AP, “That’s just putting me as the employer in a really difficult position.” It’s an especially tough dilemma for people who run businesses that have been completely shut down like bars or hair salons. What are you going to do, rehire people so they can earn less and still not work? On lefty Twitter, the common retort to all this is that businesses should just pay their workers more if they want to hire them back. But that’s a bit tricky when your revenue has fallen to zero.

None of this suggests that Congress made a mistake by supersizing unemployment benefits. It just means that lawmakers did a poor job designing the Paycheck Protection Program to mesh with other parts of the relief effort, which, given how many other ways the small business rescue has failed, suggests that Capitol Hill might want to rethink it while we still have an economy to save.

But that seems a bit unlikely to happen at this point. Instead, I expect the howling about “hot tub unemployment” benefits from conservatives to continue. The reason is simple: Right now, the $600 benefits are scheduled to last through the end of July, which will make it harder to convince many low-wage workers to go back to work significantly before then. For anybody who’s dead-set on reopening the economy prematurely, it is in fact a problem that we’re paying people to stay home.