Incentives Matter: Unemployment Edition

Both Janet Yellen and Joe Biden insisted “enhanced” unemployment benefits weren’t incentivizing people not to work. The numbers prove them wrong.

In a podcast, Peter Schiff said the notion that generous unemployment benefits weren’t motivating people to remain unemployed was absurd.

Only government economists could fail to understand this obvious relationship. There is a preference for leisure over work. People would prefer to have leisure than work. The only reason they give up their leisure to work is because they need the money. Because otherwise, they can’t pay their bills. They can’t pay the rent. They can’t put food on the table. So, even though they would prefer leisure, they have to work. Well, if the government says, ‘No, you don’t have to work. You can have the leisure that you prefer and we’ll replace your lost income. In fact, we will actually give you more money to take a vacation than what you would earn if you gave up that vacation and went back to work.’ How can anybody not realize that there is a link here between these lucrative payments not to work and so many people choosing not to work?”

And the numbers prove him correct.

The labor market has been out of whack for months. With the US government handing out enhanced unemployment checks, we ended up in a bizarre situation with high unemployment even as job openings hit record levels. Recently, some states have rolled back those unemployment benefits, and unsurprisingly, unemployment has dropped more quickly in those states than in those that retained the enhanced benefits.

WolfStreet did an analysis of continuing unemployment claims released on Sept. 2. “Continued claims” include people who have been on unemployment for at least one week. A drop in that number indicates people have gone back to work.

Since the end of June, continuing claims nationally have dropped by 20% to 2.62 million people. That’s the lowest level since March 2020.

More significantly, continuing claims have dropped more than twice as fast in red states that cut the extra $300 per week from their unemployment benefit.

In states that ended enhanced benefits, continuing claims dropped by 32%.

In states that kept the enhanced benefits in place, continuing claims dropped by just 14%.

The first group of states ended enhanced unemployment in early June. Florida and Texas joined them at the end of June.

WolfStreet isn’t alone in reaching the conclusion that enhanced benefits also enhance unemployment. The Wall Street Journal reported on Goldman Sachs’ economists who scrutinized the behavior of workers in the July jobs report. Adjusting for age, gender, marital status, education and household income, they found “clear evidence that benefit expiration increased the rate at which unemployed workers became employed.”

Goldman Sachs estimated that if all states had ended benefits, July payroll growth would have been 400,000 stronger. Economists at the firm projected the nationwide benefit cutoff this month will account for 1.5 million job gains through the end of the year.”

This shouldn’t come as a shock. As economist Paul Prentice pointed out, you always get more of whatever you incentivize and less of what you disincentivize.

The supplemental unemployment payment does both—it incentivizes people not to work, and simultaneously disincentivizes them from working.”

As WolfStreet explained, anybody trying to hire employees has figured out “in their gut” that part of the “labor shortage” is due to government incentives not to work “with the extra $300 a week in benefits, on top of the state benefits, on top of not having to pay rent due to the eviction moratoriums, or not having to make mortgage payments due to the forbearance programs. The extra $300 a week was designed to allow people to pay for housing, and then they didn’t have to pay for housing either.”

The bottom line is you can ignore the laws of economics. But you can’t ignore the consequences of ignoring the laws of economics.