How Long Should We Keep Bribing People Not to Work?

A $600 boost to unemployment benefits was a clumsy solution to a stupid problem, and it cannot continue once we reopen.

Three Republican senators raised an alarm in late March: Congress’s multi-trillion-dollar coronavirus bill would boost unemployment benefits by $600 a week — such a large amount that many people would make more if they were laid off than they would if they continued working.

It turned out there was a stupid, embarrassing backstory behind this provision. States administer unemployment benefits using antiquated computer systems, and they couldn’t process a new benefit formula that was even mildly complicated. If lawmakers wanted to hike unemployment benefits during the worst part of the crisis — a time when government policy was deliberately idling much of the work force — they had to pick a flat amount to add to the existing benefits, and $600 was chosen because it would make the average unemployment benefit equal to the average wage.

Sometimes you have to make the best of a bad situation, and this was the solution that presented itself. But these benefits expire at the end of July, Congress has to decide what comes next, and the bill the Democratic House passed would extend these payments until next January. That is a terrible idea, and the Republican-led Senate needs to figure out something better.

As a new paper from three economists at the University of Chicago demonstrates, the $600 boost fails to help workers in an equitable fashion and creates terrible incentives. It would be a poor fit for our coming circumstances, in which states are reopening and the economy should gradually improve. If, in this next phase, we want to keep the unemployment system a bit more generous than it usually is, we will have to either make the boost smaller or force states to implement a formula that actually makes sense.

WHY WORK? I’m earning more now

The list of problems the paper uncovers is staggering. The $600 benefit makes unemployment insurance more remunerative than work for two-thirds of eligible workers. The median worker can get 134 percent of what he earned before. (If you’re wondering how this can happen when the average payout is set to equal the average wage, it boils down to the difference between a median and a mean; see the discussion on the report’s first page.)

Read the rest from Robert VerBruggen HERE.

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