Do Unemployment Benefits Disincentivize People to Go Back to Work?

Author: Wayne Chien

Beliefs on the Right 

One of the main contentions made by the Republican Party in opposing the expansion of new Federal Unemployment benefits for Covid-19 is their opinion that added benefits disincentives people to return to work. The belief that extended welfare programs will negatively impact the working community is not new to Neoclassical Economists. What is central to the conservative solution to solving poverty was the idea that work would provide a sense of self-worth, which would almost guarantee economic growth for the individual. Conservatives would come to believe that any work was better than being on welfare and that the less a person worked, the more likely they would fall back into poverty, which can explain why Republicans are weary to approve any additional unemployment programs. 

There are two questions I want to address in analyzing the GOP’s fiscal ideology in regards to our unemployment and Covid-19 crises. One is to determine if a disincentive for those on unemployment to return to work actually exists, and whether or not this phenomenon is preventing the V-shaped economic recovery that has been touted by President Trump.

Running the Numbers 

The Federal Pandemic Unemployment Compensation under the CARES act passed on March 27, 2020, gave an extra $600 of Federal Aid to those who met various state unemployment requirements. What this meant is that individuals who qualified for their state unemployment insurance, which gave about an average of $320 per week had an added bonus of $600 per week. After doing the math, we can see the Republican picture much clearer in why they see extended federal unemployment benefits as a disincentive to work. A minimum wage employee making $13 an hour in California would take home about $520 working 40-hours a week before taxes. An individual on California’s maximum state unemployment benefits would take in $450 a week, but with the added $600 from the Federal Government, this figure would jump $950 a week, almost double what a minimum wage worker would make. From a purely financial standpoint, it makes little sense to return to a job that pays less with no work, which is a point that is stressed for many Republicans in Congress. Conservatives are correct in that such an expansion of federal unemployment benefits is a disincentive to work, however, what I also want to consider is whether or not people have enough opportunities to go back to in an economy that has been drastically changed by Covid-19. 

The Economy and Covid-19

The proponents of extending unemployment benefits argue that although unemployment has seen a dramatic decrease since its peak at 14% in April to at around 8.4% in August, there are still 21 million Americans who remain out of the workforce. One of the reasons that people can’t simply return to their old jobs or find something new to do is because of the uncontrolled nature of the coronavirus pandemic in the United States. In many places, it is simply not safe to open many service sector industries such as indoor dining, movie theaters, and retail malls. States who did try and reopen early at the start of May saw spikes which caused them to close down again, causing more financial harm for small businesses and those who rely on a stream of physical consumers to drive income. For us to see the V-shaped recovery of the economy that President Trump has touted, there has to be control over the pandemic so that increased economic activity does not cause more cases of the coronavirus to spread. 

How to Remove Disincentives to Work

If Republicans view extending Federal Unemployment Benefits and the closure of many nonessential services as what is driving the economic crisis, then their solution should be to reduce the spread of Covid-19 so that businesses can go back to work safely. Right now the extra unemployment benefits from the federal government act as a lifeline for the millions whose jobs have disappeared, which is essential for those trying to stay afloat. To bring jobs back and end the disincentive to work, we as a nation need to contain Covid-19 through social distancing, wearing masks, and practicing hand washing. Any attempts to induce a type of herd immunity through the elimination of pandemic control measures would not only be catastrophic for human life but will also not help the economy get back on its feet. For Americans to get off unemployment and keep the economic engine roaring, we as a nation have to commit to the goal of eradicating this virus.  Over the second quarter, the United States saw an overall decrease in GDP of 31.4%, and although Americans have been trying their best to get back to work, the industries and life we once have will not be able to return unless the pandemic is completely under control and people can feel safe taking part of the economy. 

Stimulus packages that overpay unemployment benefits are in fact a disincentive to work, but this doesn’t paint the whole picture. Federal Unemployment benefits protect millions of Americans that cannot find a job due to the pandemic, even if it disincentivizes some to return to work. Eliminating Covid-19, not ending benefits, will ultimately lead us to the end of this economic crisis, which is what our government should currently focus on.