Reining in Unemployment Benefits is the Right Call for Louisiana
During the COVID-19 pandemic, the federal government expanded the unemployment benefit to an extra $300 weekly in an attempt to combat income loss with the shutdown of the economy. As our economy is beginning to recover, “help wanted” signs have become a norm all across the Pelican state. In Louisiana’s recovering economy, the expanded unemployment benefit created an unintended consequence that hurt small businesses and workers. Fortunately, Governor Edwards surprised the nation and joined over twenty states in ending the extra payment.
No matter how well intentioned, paying people not to work can produce unintended social side effects. The primary issue is simple: those who can work, may refuse to work and delay a return to the workforce to take advantage of what they perceive to be free money while unwittingly hurting their own future career prospects. The more generous the unemployment benefits are, the more time people spend unemployed. These employment gaps can hurt future career prospects and cause the erosion of the most valuable workplace skill in demand: experience.
Another issue arises as employers struggle to recruit workers back. In human society, we depend on each other to work. As employers struggle to compete with free money, the cost of recruitment rises, work takes longer to advance and production slows. This isn’t just true for private corporations, it’s also true for small businesses. Slowing down the country during an economic recovery harms us all.
It’s easy to dismiss this concern by making calls to pay people more. However, this also has issues, any gain in worker pay will have to be balanced with the rising cost. Logically, it’s not enough to pay workers more than they would otherwise receive in unemployment benefits. This is because of the tradeoffs being made. For example, getting paid with little to no effort will be more appealing to some than getting paid marginally more to do a lot. Meaning, employers have to offer well over the value of the unemployment benefits to coax workers back. As both public and private employers start a bidding war for labor, the cost of living will rise for everyone.
COVID-19 has had an extremely disruptive effect on Louisiana’s economy and so has the government’s response. In order to write Louisiana’s comeback story, getting people back to work and keeping Louisiana open is the best path forward. Ending the enhanced federal unemployment benefits program early will help kickstart the economic recovery in Louisiana.
For more information:
Select Studies on Unemployment Insurance: In Relation to Unemployment Duration & Future Earnings:
Kyyrä, T., & Pesola, H. (2020). The effects of unemployment benefit duration: Evidence from residual benefit duration. Labour Economics, 65, 101859.
Rotar, L. J., & Krsnik, S. (2020). Analysing the relationship between unemployment benefits and unemployment duration. Society and Economy.
von Wachter, T. (2020). Lost generations: long‐term effects of the COVID‐19 crisis on job losers and labour market entrants, and options for policy. Fiscal Studies, 41(3), 549-590.
Le Barbanchon, T. (2016). The effect of the potential duration of unemployment benefits on unemployment exits to work and match quality in France. Labour Economics, 42, 16-29.
Price, B. (2016). The duration and wage effects of long-term unemployment benefits: Evidence from Germany’s Hartz IV reform. MIT Working Paper.
Card, D., Johnston, A., Leung, P., Mas, A., & Pei, Z. (2015). The effect of unemployment benefits on the duration of unemployment insurance receipt: New evidence from a regression kink design in Missouri, 2003-2013. American Economic Review, 105(5), 126-30.
Cooper, D. (2013). The effect of unemployment duration on future earnings and other outcomes. FRB of Boston Working Paper No. 13-8
Lalive, R., van Ours, J. C., & Zweimüller, J. (2011). Equilibrium unemployment and the duration of unemployment benefits. Journal of Population Economics, 24(4), 1385-1409.
Van Ours, J. C., & Vodopivec, M. (2006). How shortening the potential duration of unemployment benefits affects the duration of unemployment: Evidence from a natural experiment. Journal of Labor economics, 24(2), 351-378
Katz, L. F., & Meyer, B. D. (1990). The impact of the potential duration of unemployment benefits on the duration of unemployment. Journal of public economics, 41(1), 45-72.
*This is not an exhaustive list.