In States that Ended the Extra $300/Week Unemployment Benefits, People Returned to Work at Over Twice the Rate than in the Other States

Anecdote # 1. In June we stayed a couple nights in a motel in western Massachusetts. The proprietor was outside watering flowers and trimming shrubs. I asked about business. He told me, “Well, we are starting to get customers back, though we are still hurting. But my bigger problem is that I cannot find a single person who wants to come back and work. Between federal and state unemployment benefits, they are making $850 a week, which is over $21 per hour. Anybody can claim those benefits, you don’t even have to prove that you were laid off. I cannot match that money, much less beat it.  My wife and I are doing all the work. I don’t know how we will manage long term.”

I murmured something sympathetic, and opined hopefully that if these benefits run out in September, folks might come back to work. This area has been economically depressed for decades, and normally people would jump at any kind of job. He shook his head and said that the state benefits would continue, and that his key workers have told him that they have saved so much money from unemployment and stimulus funds (and perhaps being allowed to skip rent or mortgage payments due to federal “forbearance” laws) that they may never come back to work.

Anecdote #2. In July my wife and I went into a hardware store in northern Virginia to buy some stuff. The employees were helpful and efficient. My wife complimented them, and said something like it must be nice working in an environment where everyone seemed to have a good attitude. The clerk’s response was yes, but they were having to work more overtime than they really wanted. And why was that? Because  the other workers won’t come in, because they were making about as much money staying home on unemployment – – so why should they bother working?

Those are a few personal data points on the effects extending the big unemployment benefits. I have read numerous other anecdotes from small businessmen and women that they cannot operate as fully as they would like because they cannot get help. And really, anybody with eyeballs can see the Help Wanted signs everywhere today.

Deeper thinkers than I will have to tease out all the ramifications of this situation. In GDP growth terms, it seems clear that incentivizing people to not work is a bad thing. On the one hand, we could say, “Just pay the workers more and they will come”. That is fine, if a business can raise the prices it charges for its products to cover the added labor costs, but that can only go so far. What is more likely is that businesses will figure out ways to get by permanently with fewer workers. This may lead to higher nominal productivity per worker, but also more structural unemployment.

Without further ado, here are some data which may illuminate the extent to which extended unemployment benefits have kept people from working. The nation has been running a real time experiment over the past several months. 27 states (“red” states, as you would have guessed) stopped the extra $300/week benefits in June, while 23 states and DC retained them.

Wolf Richter has compiled some numbers on unemployment insurance (UI) claims by state, reported weekly by the Department of Labor. A data point of “continued claims” reflects the number of people that have claimed UI for at least one week. A drop in continued claims would indicate that they have started working again. He lumped the states into two groups, “Enders” who terminated the extra unemployment benefits, and “Keepers” who retained them. Here are the results through the end of August:

These results seem to speak for themselves. Far more people went back to work in the “Ender” states (32% vs. 14%).  Here are the same results, reported as four-week rolling averages for smoothing, though that introduces a time lag:

Richter quotes the Wall Street Journal to the effect that:

Economists at Goldman Sachs analyzed the behavior of workers in the July jobs report after adjusting for age, gender, marital status, education, household income, industry and occupation of a respondent’s current or prior job. They said they found “clear evidence that benefit expiration increased the rate at which unemployed workers became employed.”

Goldman Sachs estimated that if all states had ended benefits, July payroll growth would have been 400,000 stronger. Economists at the firm projected the nationwide benefit cutoff this month will account for 1.5 million job gains through the end of the year.

Richter notes that after the federal cutoff, some states will continue to offer the $300/week funded with leftover stimulus money, but he expects overall more people to report for work this fall. I think that is likely, but I am concerned that conditioning a lot of people to not work for 1.5 years may have given us a long-lasting step downward in the percentage of adults who are willing to work. Some other post, some other time, maybe I will explore how we saw that effect in the wake of the 2008-2009 Great Recession where again people got conditioned to getting by without working.

P.S. Zachary Bartsch’s recent post on this blog, Redesigning Unemployment Insurance, speaks to some of these issues of incentivizing people to (not) work.