Montana just took the plunge.
Montana just took the plunge.
W hen the last Democratic president signed Obamacare, some red states resisted. They refused to expand their Medicaid programs — losing federal dollars in the process — to voice their displeasure and undermine a law they couldn’t stand.
Now, cutting off expanded unemployment benefits may provide a similar opportunity vis-à-vis Joe Biden’s big-spending agenda.
This week, Montana took the plunge. Come the end of June, its unemployed residents will no longer receive the extra $300 a week, above and beyond the normal benefit levels, that Biden’s COVID bill extended through September 6. Instead, folks who return to work will get a $1,200 bonus after their first four weeks. In an ironic twist, the bonuses are funded out of the lavish relief funds that the COVID bill gave to states.
South Carolina has already followed Montana’s lead, and it’s not a bad idea. Last year’s unemployment boost turned out far better than some feared, but only because the economy was in such poor shape. Continuing to pay a huge boost as the nation pushed through the final stage of the pandemic was never a great plan, and we’re seeing signs that the extra money is keeping workers home.
The boost last year — $600 a week, continued briefly at $300 a week under an executive order — has been studied extensively at this point. The consensus is that it pumped some money into the economy at a crucial time while not having much effect on labor supply. But there are some troubling findings in these studies as well.
First, the boosts were big enough that we should be very worried about unintended consequences. The $600 top-up paid most workers more than they’d made while employed, and the $300 boost overpays about 40 percent of workers. (The boosts are structured this way — a flat amount layered on top of the normal benefit, rather than a certain percentage of previous earnings — owing to the obsolete computer systems that states use to administer benefits.)
Second, the boost did reduce job applications. It just didn’t matter very much, because so many Americans were unemployed and so few employers were hiring.
And third, when the $600 boost ended in August of last year, there was a noticeable surge in people leaving unemployment for jobs. True, that surge represented a small proportion of those who’d received benefits and a tiny hit to overall employment. But even during the height of the pandemic, some effect was apparent when the government paid people more to stay home than they’d make working. And studies from more-normal times show bigger effects.
Unfortunately, we don’t yet have rigorous research on the effects of this new boost. But the economy is quickly recovering, meaning we should not expect this top-up to have the same muted effect as the last one. And employers around the country are reporting trouble finding workers — often saying it’s hard to get people to show up if they can make a similar amount of money on unemployment.
Nationally, we hit 6 percent unemployment (and falling) in March. That’s above the 3.5 percent we saw in February of 2020, but it’s down more than half from the nearly 15 percent we saw two months later — and it’s not too bad a rate in historical context. We saw similar numbers in 2014, 2003, and 1994.
In some states, things are even rosier. Montana’s unemployment rate was 3.6 percent before the pandemic struck and 3.8 percent as of March. In total, 21 states had a rate below 5 percent in March.
The economy is, simply put, no longer in a place where we should be paying out oversized unemployment benefits on the idea that people just can’t be expected to find work. With vaccines widely available, letting people stay home to stop the spread of the virus has faded as an excuse, too.
Also, employers nationwide contend there’s a hiring crunch. News reports are full of anecdotes, and a survey from the National Federation of Independent Business found record numbers of businesses reporting job openings they couldn’t fill.
Unfortunately, more-scientific analysis is scarce at the moment. Some skeptics hypothesize that the worker shortage is just a typical effect of recovery, or that workers are still hesitant because of the virus, or that ongoing school closures are keeping parents at home. Daniel Zhao of Glassdoor, however, notes that job-search activity (measured through Google queries) dipped severely in March before only slowly recovering toward its previous level. To my eye, that looks an awful lot like an effect of the COVID bill signed in the middle of that month.
Extending the unemployment boost through early September was a risky move, and the evidence is growing that it was a mistake. But it’s one that red states, especially those whose economies are nearing a full recovery, have the chance to opt out of. How many will take it?