Numbers Do Not Lie: Unemployment Bonuses Stimulate Unemployment

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America’s labor market has significant structural problems. Despite about 9 million people being unemployed, there are about that many job openings and employers cannot seem to find willing workers.

There were 9.3 million unfilled job openings on April 30, 1 million beyond the previous record in March. More than a third of the 1 million monthly increase is in the food services industry. There are “help wanted” signs everywhere at restaurants, bars, and hotels. Despite offering signing bonuses and other incentives, these businesses simply cannot compete with the federal government’s generous unemployment insurance (UI) bonuses and other handouts.

These destructive policies have increased unemployment by millions and created what’s been called the great American labor shortage.

Those consequences, while unintended, were not unforeseen.

Casey Mulligan, Steve Moore, and I forecasted these effects a year ago and released a study in March 2021. But we were not alone; many other economists sounded the alarm loudly and often.

It went unheeded—until recently. Half of the states, including Texas, have announced an end to the UI bonuses; but the numbers do not lie, and the damage is already done.

A recent Wall Street Journal article highlighted our research. We found in all 25 states that are continuing the UI bonus, a family of four can currently receive the annual equivalent of more than $82,000 in income—while not working. In 19 states and D.C., the amount is more than $100,000. In Massachusetts, it is over $147,000. If the two children in the family are under 6, then the amount is even higher.

This is not a partisan issue. Even far-left economist Paul Krugman, an ardent supporter of UI benefits, admitted that the federal UI bonuses could be having an impact. Jason Furman, an economist who served in the Obama administration, also concluded the UI bonuses are promoting unemployment.

These incentives extend far beyond just UI benefits, though.

There are health care subsidies, food stamps, rental assistance programs, and other forms of governmental assistance available. In fairness, you cannot simply add the value of all these programs together since many will be mutually exclusive. Nevertheless, what was intended to be a robust social safety net has transformed into a hydra of convoluted welfare schemes that incentivizes people to remain unemployed and on public assistance.

Rental assistance is just one example of a program that offers surprisingly large payments. In Madison County, Mississippi—the state with the lowest income—a family can receive over $12,000 a year for rent. They can receive almost $21,000 a year in Norfolk County, Massachusetts. In Loudoun County, Virginia, they can receive over $24,000 a year—just in rental assistance.

What is the fix for such a fundamentally broken labor market? It is surprisingly simple—we only need to remove those things which are hindering it. If you remove the wrench from the works, so to speak, the clockwork will return to normalcy, and in short order. The perverse incentives should be removed immediately so that the labor market can function properly.

When people are not paid to stay home, they lose the incentive to stay home. Income will again be tied to working, as it has been for nearly all human history.

These handouts are sabotaging the economic recovery and our financial future. The longer they continue, the further America drifts toward the falls, and at some point, the ship of state will be unable to turn around.

While the current situation of millions unemployed may seem grim, remember that things also appeared bleak in the late 1970s. Look how quickly they turned around after removing the perverse incentives created by government overreach then.

To read more about our research, click here.