Opinion: A Warning Sign for UBI? Unemployment Benefits Discourage Employment

Economic prognosticators were abuzz last year with optimism about a so-called “V-shaped recovery.” With vaccines rolling out across the country and lockdowns lifting, the economy has indeed been recovering, but with one notable caveat: Despite reopening, many businesses are still struggling to find employees.

The most likely culprit is the federal unemployment bonus that began during the Trump administration and continues today.

It’s important to first understand what the unemployment bonus is and why it may be keeping otherwise healthy people out of the labor force. The bonus is a federally funded $300 weekly supplement that is paid out in addition to state-provided unemployment benefits. These state unemployment benefits usually replace about half of an unemployed person’s weekly wages for several months as they search for new employment. While this amount varies by state, the average pre-bonus weekly payment is about $350.

The federal bonus, however, raised that amount to $650 or $2,600 per month—the equivalent of earning just under $34,000 per year. For some workers, particularly those working in sectors like restaurants or hospitality, the unemployment benefits pay more than their wages when working. In fact, the median personal income in the U.S. in 2019 was just slightly higher than this amount at $35,977.

Given these numbers, it wasn’t totally surprising that the U.S. economy only added 266,000 jobs in April, rather than the nearly one million experts had predicted. Simply put, people respond to incentives. If someone can earn about as much or more by taking unemployment benefits than they can by working, it shouldn’t be surprising if at least some people choose to remain out of the labor force. But getting people back to work isn’t just about growing GDP or ensuring that local businesses can find enough employees to stay open and serve their customers; jobs offer a host of benefits beyond just macroeconomic indicators.

A job is still the best way to climb the income ladder. Jobs provide people the experience and skills necessary to become more productive and increase their earning potential.

There are also benefits to employment beyond just monetary compensation. People who are unemployed for six months or more are much more likely to struggle with depression. Furthermore, working can be a source of creating or maintaining important social bonds, providing people a way to contribute to a family or community—essential ingredients in promoting a sense of meaning in life.

Recognizing the need to get Americans who can work back into the labor force, at least 12 states have already decided to end their participation in the federal program providing the unemployment bonuses, which are scheduled to expire in September. Additionally, several states will also offer to pay out at least a portion of the enhanced benefits as a lump-sum “signing bonus” for those who find employment and remain employed for a certain period of time. Montana will offer one-time payments of $1,200 to individuals who move from unemployment to work and complete at least four weeks of paid work. In Arizona, eligible individuals who return to a full-time job will receive a one-time payment of $2,000, with those returning to part-time work eligible for a $1,000 one-time payment if they complete at least 10 weeks of paid work.

Meanwhile, at the federal level, Senator Ben Sasse (R-Neb.) announced that he will introduce a similar piece of federal legislation once the Senate returns to session. Senator Sasse’s proposal, the National Signing Bonus Act, would pay individuals who get a job by July 4th a bonus equal to 101 percent of the federal enhanced unemployment insurance benefit (to be paid in multiple installments).

Policymakers must use the boosted unemployment insurance benefits as a test case for what could happen when implementing other expanded benefits programs. In addition to their relatively high dollar figure, the federal unemployment bonuses are also not contingent upon participants seeking employment, as would be required for most state-level benefits.

Taken together, such benefits approximate a temporary universal basic income (UBI) for unemployed workers, offering a lesson in how such programs could impact rates of employment. While factors other than the enhanced federal unemployment insurance bonuses are likely also affecting the economy’s recovery, the risk hinted at here should not be ignored.

A job is still an important piece of pursuing the American Dream. Public policy should take special care not to discourage employment.

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