Moneybox

Cutting Unemployment Benefits Hasn’t Sped Up Hiring

Lindsey Graham holds up a memo at a hearing.
Lindsey Graham, take note.* Carolyn Kaster/Getty Images

Republicans were certain that the jumbo unemployment benefits Congress created in the CARES Act were going to hold back hiring and the hurt economy once businesses tried to reopen. Thanks to the extra $600-per-week payments, many workers were suddenly able to collect more in government benefits than they’d previously earned at their jobs, and as a result, lawmakers believed that, given the choice, Americans would largely choose to stay at home, rather than return to the grind. As South Carolina Sen. Lindsey Graham put it: “If a person is making $23 an hour on unemployment, it’s going to be hard to get you go back to work for $17 hour job.”

This was not a totally ludicrous idea, at least in the abstract. After all, economists calculated that the median beneficiary stood to collect 134 percent of their old income in unemployment aid. That would seem like a pretty powerful incentive to wait out a pandemic in your living room, possibly while taking care of your kids, rather than return to work and risk catching the plague.

But reality seems to have bucked the GOP’s expectations. There have of course been lots of anecdotal stories about small businesses that have had trouble luring their workers back, because their staff preferred to keep collecting benefits. But by August, economists had cranked out at least four different studies that failed to find evidence jobless aid had significantly weighed on employment overall. (Counting a less formal analysis by Evercore ISI economist Ernie Tedeschi, there were five.) Meanwhile, hiring seems to have slowed down, rather than sped up, since the $600-a-week payments expired at the end of July, which is the exact opposite of what you’d expect if government benefits had been suffocating the economy. In June, employers added 4.8 million workers to their payrolls; in July they added 1.7 million; and in August they tacked on just 1.4 million. Econ 101 assumptions about incentives and the labor market just don’t seem to have panned out.

Why not? One can imagine a few different potential answers (none of which, by the way, involve the $300-per-week benefits the Trump administration has tried to jury-rig through executive order, which are only being paid out in a few states so far). Some people just like to work, even if it means potentially exposing themselves to a deadly virus. Others may have thought it wise to take a job because the $600-a-week payments were only temporary. Still others might have been worried that turning down their old job would cost them their benefits, anyway (UI recipients can lose eligibility if they reject an employment offer). Some may have just wanted to chip in and help their employer stay afloat out of loyalty.

The simplest answer, though, is that while some Americans did stop looking for work, there were so few jobs open, and enough other people who wanted them, that it didn’t really hurt employers’ ability to hire. That’s the basic finding from an August paper by economists at the University of Pennsylvania, the Federal Reserve, and job search site Glassdoor, which looked at the number of help wanted ads and applications on its platform before and after the pandemic set in.

Job applications did in fact fall by 21 percent on Glassdoor once the coronavirus crisis went into full swing. But job openings plummeted by a full 64 percent. As a result, the number of applicants per vacancy actually increased after the CARES Act. The team did find some evidence that the number of people applying for jobs may have dropped a bit further in states with more generous unemployment benefits, but it wasn’t enough to make a meaningful difference in the grand scheme of things.

In an ordinary economy, paying people more money to stay at home than they’d make at work would obviously have a horribly distortionary effect on employment. But we aren’t in a normal economy. We’re in the midst of a pandemic, which has completely cratered the demand for workers in some large industries. The only thing that’s going to restore the job market entirely back to normal is beating this disease.

Correction, Sept. 4, 2020: This post originally misspelled Lindsey Graham’s first name.