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  • Writer's pictureOren Levin-Waldman

The Argument that Labor Shortages are Due to Additional Unemployment Benefits is Overly Simplistic

The latest jobs report is weak noting that there are labor shortages, and that employers are having a hard time filling jobs. Of course the typical conservative response has been that because the federal government has extended UI benefits and have added to the payments an additional supplemental benefit, unemployed workers have no incentive to return to work. Although this argument is nothing new and reflects the standard reservation wage theory, it is also overly simplistic.

The purpose of UI was to provide replacement income so that unemployed workers would have time and space to match their skills and abilities with those jobs that are available. In the past, especially in a manufacturing based economy, employers knowing that their workers could receive UI benefits, had little incentive to maintain their workforces during a downturn. Because most states finance UI through ratables, those firms with a greater history of layoffs can be expected to pay higher premiums. Still, employers never paid the full costs of laying their workers, and workers have never received sufficient replacement income to support themselves.

Although many countries around the world provide benefits between 75 to 80 percent in lost wages, most states barely reach 50 percent, and even then there is a maximum so that those on the higher end are effectively getting 20- 30 percent in replacement income. What, then, is the incentive not to work? Some studies in the past have suggested that UI generally lengthens unemployment spells as workers will typically wait until their benefits are about to run out before they seriously start looking for jobs. At best, one’s unemployment is prolonged by a couple of weeks, but it is hard to believe that most people would turn down a job if their UI replacement income is only a fraction of what their market income would be from a job.

The reservation wage holds that there is a wage beneath which one will not accept a job. This reservation wage is usually the last wage received prior to unemployment. Most state UI programs require unemployed workers to accept “suitable” jobs that are offered. One is not required to accept a job that pays more than 10 percent less, but suitable in many cases will be defined as a job paying up to 10 percent less. Therefore, proponents of the reservation wage theory maintain that UI generally speaking, and excluding any type of supplemental payments, similarly prolongs unemployment.

Now we can address the current labor market where the unemployment was caused by government mandated shutdowns in response to a pandemic. A policy response preferable to the various COVID relief packages would have been to not send every worker, regardless of whether they lost their jobs, a stimulus check. Rather those locked out of their jobs and those business owners forced to close should have received 100 percent compensation in lines with the Constitution’s Fifth Amendment ‘Takings’ clause.

Both business owner’s property and workers’ property in their labor was effectively seized by the state without just compensation. Yes, the initial CARES Act, provided loans to businesses which would be forgiven if they maintained their workforces. Perhaps if shutdowns only lasted a few weeks, as we were initially told in order to flatten the curve, this would have been enough. But shutdowns ended up lasting for months, and even businesses that could reopen could only do so at in many cases 30 percent capacity. Given that, how likely is it that these workers would have been called back?

To simply blame labor shortages on supplemental benefits misses much of what has been happening, as well as it reveals many hardships particularly for low-wage workers. Workers with children but with no place to put their kids are not likely to return to work. Most of the county’s schools have been operating remotely, thereby forcing workers to stay home with their children.

Still, the question remains: Are current labor shortages a function of generous UI payments, especially the supplemental payments? It is possible particularly at the low end of wage scale, but as one moves up on the wage scale, it is highly unlikely. Any number of workers could still be afraid to return to work because the nature of their jobs is such that they will have high exposure to other people (many of whom have still not been vaccinated) and therefore they are at a greater risk of contracting the virus themselves.

Although it is possible that these benefits, particularly at the low end of the wage distribution may be a factor in these labor shortages, it is most likely not the determining factor. And yet, it begs another question: if employers really believe that workers are forsaking work just to get more benefits, then why not respond according to the dictates of the marketplace? The laws of supply and demand still apply here. Employers seeking workers amid labor shortages can always offer higher wages.

Perhaps that is the rub. Employers don’t really want to pay workers more because it will increase their costs and/or eat into their profits. It is always easier to blame workers as they have done for years. In the face of global competition, businesses have often accused workers of wage rigidity, i.e. not being flexible in their wage demands.

Is there no room for compromise? In all likelihood these defined supplemental payments were offered because it was easier for state labor departments to offer. The policy should have been designed to ensure workers would get up to 80 percent, and maybe even 100 percent of their wages, but that would have been much more complicated, as each worker’s record would have to be searched and evaluated on its own merits and according to a formula. This would no doubt result in workers experiencing delays in getting anything.

The UI system does need a complete overhaul. States should be offering higher reimbursement rates, and they should be making it more costly for employers to lay their workers off. And yet, since these extended benefits are temporary, states concerned about their effects could always tweak them. Why not require that workers accept jobs that are offered with the state paying them the difference between their employers’ wages and their current benefits? If jobs remain unfilled, we will know that this is not the main reason. Moreover, it enables employers to continue offering lower wages.

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