Analysts now have sufficient data to determine if the generous unemployment benefits doled out during the pandemic reduced the incentive to work and thus employment. Economic theory claims that generous benefits would disincentivize idled workers from returning to the workforce. The claim is a viable one, but often what transpires is quite different because other factors come into play.
Approximately half the states — mostly with conservative legislatures and governors — cut off the enhanced unemployment benefits early, even though the federal government was paying for it. That includes Florida. The justification for the cutoff was that generous unemployment benefits were deterring workers from looking for employment, making it difficult for employers to fill job openings.
So, analysts wanted to determine if states that cut benefits early showed a quicker return to employment than states that didn’t. Economists at various universities analyzed the data and determined that the benefits did not result in a significant drop in employment in the week after the benefits took effect. Nor did states that cut off federal benefits early experience a significant increase in employment. The Economist found that the share of working-age people who were employed rose by 3.5 percent in states that kept the benefits, exceeding the 2.7 percent increase in states that cut them off early.
Some studies did find a decline in employment, but it wasn’t statistically significant, meaning that one cannot claim with much confidence that providing the benefit led to a meaningful decline in employment and that eliminating the benefit led to a rush of people re-entering the workforce. A caveat worth noting is that the data covers a short time period, which might not be indicative of similar results if the benefits were doled out for a longer time period.
It seems that lower paid workers re-entered the work force if they felt safe and found rewarding jobs even before their benefits expired. Foregoing employment in rewarding work for a few weeks of extra benefits was not worth the risk of losing the job to another worker.
Some workers who were dissatisfied with their jobs are taking their time looking for better employment. The generous unemployment benefits has given them the luxury to find better jobs. Some not wanting to risk bringing the virus home to young children opted to stay home in the interest of safety. These could be the reasons why some workers are still out of the workforce.
Other workers, mostly seniors with sufficient retirement income, have decided to leave the work force permanently. The lost income was not worth the free time that they enjoyed during the layoffs. Free time for leisure and other activities can be viewed as a consumption good. If the utility — joy, in other words — derived from free time is high, then you are willing to pay a significant price for it which is the income lost from not working. Goldman Sachs estimates that about one million seniors have opted not to return to their jobs.
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All in all, generous unemployment benefits have not reduced employment as was proposed by conservatives. Shifting demographics might explain why employers cannot find a sufficient number of workers and why employees are now in the driver’s seat when it comes to jobs, compensation, and benefits.
Murad Antia teaches finance at the Muma College of Business, University of South Florida (USF), Tampa.