I was in favor of some expansion of unemployment benefits to help the large number of workers displaced during this crisis, even though government programs always create some level of distortions. I also thought that the expansion rushed and passed by Congress through the CARES Act was excessive in size ($600 per week in addition to state benefits) and length. I suspected, like many others, that the bill would create many disincentives to return to work, since some workers would make more not working than working.
Well, Main Street is already seeing the consequence of the expansion. In the Wall Street Journal this morning, Kurt Huffman, the owner of the restaurant ChefStable, writes:
The starting wage for a line cook in one of our restaurants is $15 an hour. These cooks receive at least $1 an hour in tips, so at a minimum they make $16 an hour, or $640 before taxes for a 40-hour week. The overwhelming majority of our laid-off cooks qualified for Oregon unemployment compensation of 1.25% of their annual gross wages weekly, or $416 in our example. The extra $224 a week provides a strong incentive to return to work.
But as of this week, that same employee receives $1,016 a week, or $376 more than he made as a full time employee. Why on earth would he want to come back to work?
This has had the perverse effect of making it impossible for us to hire enough people even for our limited takeout and delivery business at a time of rapidly rising unemployment. It will be an even bigger problem once we are allowed to reopen our dining rooms. And it will persist at least until July 31, when the unemployment bonus expires. I’d have to offer my cooks $25.40 an hour to match what the government is paying them not to work.
The Trump administration is talking about setting a timeline for when the country can “open for business.” For my business, Congress has already locked down that date.
Policymakers weren’t prudent when they rushed through a bill without apparently thinking through its consequences, including how it will slow down the recovery. It’s not as if we don’t have a lot of evidence about how the current UI regime creates many disincentives to work. They also failed to acknowledge the incredible burden the bill places on state unemployment trust funds, many of which will be at risk of insolvency when this is over.
In this paper at the Mercatus Center, I offer an alternative to the way we handle unemployment insurance. It would replace the current system with personal unemployment-insurance saving accounts. The idea is not new. But its time to be implemented in the U.S. has come.