While a positive monthly jobs report is always a positive, there is no question that job gains in April and May have been below expectations. This clearly demonstrates the failure of the federal government providing Americans an incentive not to work through federal unemployment insurance (UI) benefits.
The federal government currently supplies an unemployment supplement, providing $300 a week to unemployed workers in addition to state unemployment benefits. Under this supplement level, over one-third of the workforce, or 37 percent of workers make more on unemployment than at work. This benefit will last through September 6th, 2021.
Because of this program, countless businesses are unable to find workers to hire. In March 2021, the National Federation of Independent Business (NFIB) reported a record-high share of 42 percent of small businesses couldn’t fill a job opening.
Since then, job gains have been disappointing. In April, the U.S. economy added just 266,000 jobs and the unemployment rate rose to 6.1 percent, a far cry from Dow Jones estimates which predicted 1 million new jobs and an unemployment rate of 5.8 percent. In May, the numbers improved but were still below estimates. Employers added 559,000 jobs and the unemployment rate fell by 0.3 percentage points to 5.8 percent. This fell short of the 650,000 additional jobs analysts had predicted.
At present, the U.S. economy still needs an additional 7.6 million filled jobs to reach its February 2020 pre-pandemic level. With a vast majority of states and localities open, we should be seeing more growth.
In response to these concerns about labor shortages, President Biden and other Democrats have suggested that people aren’t disincentivized to work because of the UI benefits. Rather, workers are just too scared to go back to work because of the virus and/or they cannot find care for their children. In the same vein, the administration suggests, to avoid shortages, that employers just provide “fair wages” to workers. This suggestion, in and of itself, is an admission that UI benefits are disincentivizing work.
Not only is this suggestion an admission of guilt, but it’s also a poor argument. First, politicians seem to forget that they shut down and limited the capacity of American businesses for months on end. Many are still trying to recover from the losses they suffered. The idea that employers could, en masse, provide high wages to compete with the federal government’s unfettered flow of cash is radically out-of-touch and a bit cruel.
There is also no guarantee that providing marginally higher wages than what UI benefits offer would get people back to work. After all, most workers’ preference is not to work. If workers can be financially stable while not working, this could meet a higher utility level for them when compared to getting a bit more money but having to work.
Ultimately, wages are not “fair” if they’re a result of a government-created distortion in the labor market. These problems will not see a solution until UI benefits are phased out.
Thankfully, several states have begun the process of ending federal unemployment benefits early. At least 25 states, all led by Republican governors, have already begun this process, with some benefits ending as early as June 12. This will be a necessary step in ensuring the U.S. economy can go back to normal.
Federal unemployment insurance benefits have a clear depressing effect on job creation and growth. With these benefits, policymakers are making it increasingly difficult for businesses to operate and thrive. This complete lack of consideration for the economy in the long-term could cause serious damage in years to come.