Unemployment Insurance Isn’t Ideal for Helping Workers

(Bloomberg Opinion) -- The federal government’s $2 trillion economic relief bill to help the nation cope with the fallout from the coronavirus pandemic has many excellent features. The amount of money is large -- probably enough to cushion and sustain the economy for the next two months. To some extent, the bill addresses the needs of individuals, families, small businesses, big businesses, and state and local governments.

But there are lingering questions about the bill’s unintended consequences. Many of them involve the bill’s heavy reliance on the unemployment-insurance system. The small-business lending program does reward employers for keeping workers on payroll through the shutdown and the bill does give them a modest universal payout. But mainly the bill is designed to wait for people to lose their jobs and then giving them money.

One problem with this is that the unemployment-insurance system isn’t built to handle this many claimants. Already the surge is unprecedented and it’s only going to get worse:

The overloading of the system could lead to claims being delayed or even denied, leaving people without an economic lifeline.

Some legislators and commentators have identified another worry: that generous unemployment benefits will discourage work. On top of normal unemployment benefits, the bill offers $600 a week to laid-off workers. For many low-income Americans, this would amount to much more than their normal monthly income.

Does this mean that workers will find it rational to quit their jobs and receive government checks instead? Normally this isn’t an issue because only employees who are laid off qualify, not those who leave voluntarily. But the coronavirus-relief bill allows people to claim the $600 weekly benefit if they have to quit for any reason related to the coronavirus, including taking care of kids during school closures. Whether this is necessary is up to the claimant to determine, via so-called self-certification. Overburdened state unemployment systems probably won’t be up to verifying many of those claims. This means some people really will be able to abandon their jobs and raise their incomes for a couple of months if they want to.

Still, a wave of quits isn't much of a worry. First of all, it's clearly not rational for most workers to resign in the face of a looming multiyear depression just to receive a couple of thousand dollars of extra income in the short term. Second, for nonessential workers -- those not involved in food distribution, health care, utilities and basic maintenance and so on -- it’s not such a bad thing if they do quit. Less crowded workplaces help slow the spread of the infection, which pays economic dividends in the long run.

The problem is essential workers, such as grocery-store clerks, delivery workers and those in the medical field: If a large number quit, it could leave crucial industries short of labor. It also might put a kink in these companies’ hiring plans: If workers are too comfortable cashing their generous unemployment-insurance checks, they might be unwilling to fill growing numbers of jobs at grocery stores or delivery services.

The obvious response is for these employers to raise wages. But coronavirus itself has made these jobs much more hazardous, which will mean wages need to rise even more. Already this appears bound to happen, with workers at Amazon, Instacart and Whole Foods threatening or going on strikes.

Higher wages often are a good thing and stores and delivery companies can cope with having little or no profit temporarily. But if they need to raise wages a lot to lure people away from generous jobless benefits and into dangerous working conditions, some essential companies might scale back or just shut down. That could leave some people with reduced access to food or other supplies. Alternatively, these companies could raise prices a lot, which would fall heaviest on low-income consumers.

It’s not clear how much of a shortage of essential workers the combination of coronavirus and the relief bill’s incentives might create. But the government should act to avert the risk. The most obvious approach is to allow laid-off workers to continue to collect pandemic unemployment benefits in addition to salary if they go back to work in an essential industry. The downside of this approach is that it could lead to some disruption, with workers quitting grocery stores or delivery services in order to start collecting unemployment insurance and then trying to get hired back.

A more efficient solution is to subsidize pay raises for workers in essential industries, perhaps through a program where the government matches a portion of wage hikes. This would allow pay to rise to necessary levels while keeping companies out of bankruptcy. It also would avoid straining the unemployment-insurance system further because it would involve direct payments from the government to companies.

As the pandemic unfolds, the government is going to experience lots of unintended consequences and many situations in which initial efforts prove to be insufficient. It’s important for legislators to be constantly adapting, learning and fixing holes. Unemployment-benefit incentives are only one example. It’s going to be a long, hard, fraught fight.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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