With more than 1 in 5 Americans filing for unemployment benefits over the past eight weeks, policymakers' top priority is clear: restoring conditions that allow workers to resume their previous jobs or find new ones.
Federal assistance can help bridge a temporary gap in employment and incomes, but the only long-term solution is to let people get back to work. After all, deficit-financed unemployment checks are no replacement for the valuable goods and services Americans produce.
Two bills, both introduced in Congress on Tuesday, take a very different approach to helping American workers.
The first, the Getting Americans Back to Work Act introduced by Reps. Ted Budd (R-N.C.) and Ken Buck (R-Colo.), would fix a highly problematic component of the CARES Act that Congress passed in March. In addition to vastly expanding eligibility for unemployment benefits, CARES added an additional $600 a week on top of usual unemployment benefits. The Budd-Buck legislation would cap total unemployment benefits at 100% of workers' previous wages.
Full income replacement is still a big increase from the usual 40-50% of workers' wages that typical state unemployment benefit programs replace.
The CARES Act's additional $600 per week in federal pandemic unemployment benefits is certainly generous. Too generous, in fact: It's caused an overwhelming majority of unemployed Americans to receive more from unemployment benefits as from their previous paychecks. In many cases, workers are receiving at least twice their usual paychecks.
These excessive benefits are no doubt welcome to the newly unemployed workers. But in an ironic twist, businesses have factored those benefits into their decisions to furlough or lay off workers instead of keeping them on the payrolls. And those benefits are making it harder for businesses to reopen or ramp back up after temporary shutdowns and slowdowns.
In essence, businesses — especially hard-hit ones such as restaurants, hotels and — are having to compete with the federal government's generous unemployment benefits.
It's too soon to know how long unemployment will remain highly elevated, but one thing is for sure: extending already excessive unemployment benefits won't help. It will increase unemployment and reduce economic output.
According to a study by researchers at the New York Federal Reserve, the extension in unemployment benefit duration during the Great Recession resulted in a prolonged increase in unemployment, with 4.6 million more people unemployed in 2010 and 3.3 million more unemployed in 2011. And those consequences came with unemployment benefits averaging less than $400 per week as opposed to nearly $1,000 a week today.
Moreover, my colleague and I at The Heritage Foundation estimated that Congress's provision of the additional $600 unemployment benefit through July 31, 2020 could increase unemployment by up to 13.9 million and reduce output by $955 billion and $1.49 trillion between May and September. An additional six- to nine-month extension would significantly exacerbate lost jobs and economic output.
It's one thing to provide short-term and targeted unemployment benefits during forced shutdowns, but providing a year's worth of unprecedented additional unemployment benefits — up to an extra $31,200 more per worker — would cripple small businesses as they try to get back on their feet.
It's also incredibly unfair, and wholly un-American, to pay unemployed workers more than the hardworking Americans who continue to work each day.
Tacking the cost of excessive unemployment benefits onto future taxpayers is not only unfair, but also perilous, considering America's already-unsustainable fiscal outlook. If unemployment averages 10%, these additional benefits could cost every household in America an extra $3,300 to $4,000 in taxes.
At the same time, it's neither fair nor helpful to tantalize unemployed workers with unemployment benefits equal to 150% or 200% of their usual earnings, because long-term unemployment leads to lower incomes and opportunities, as well as a decline in physical and mental health.
Policymakers should be focused on helping Americans get safely back to work, including granting new flexibilities to allow workplaces to adjust to the conditions of COVID-19.
Humans are hard-wired to be productive. They will be far better off if policymakers focus on enabling work opportunities — such as removing barriers to working, trading, innovating, and investing — than on incentivizing unemployment.
Rachel Greszler is a research fellow in economics at The Heritage Foundation.