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  • Writer's pictureOren Levin-Waldman

The Mis-Excuse of the Reservation Wage

Republicans again appear to be haggling over minor stuff these days with the potential to incur huge political costs. First, there were those that wanted a payroll tax holiday. This idea, however, has been dropped for now because there is absolutely no logic to it. A payroll tax holiday provides no benefit to those who aren’t working. Simply eliminating that cost is not going to enable employers to hire more workers. Now they don’t want to extend the $600 a week enhanced unemployment insurance (UI) payment because they believe it results in workers getting more money to sit at home than work.

Although there may be a kernel of truth to this, it misses a fundamental reality which opponents of the enhancement conveniently miss, or deliberately obscure. The argument is not new. It is the old reservation wage argument in neoclassical economics, which holds that workers have a reservation wage, a wage beneath which they will not accept work. UI, the argument goes, simply raises one’s reservation wage, which is precisely what any number of Republicans in Congress are claiming right now.

Take New York state as an example where the maximum UI benefit is $504 a week. So a hospitality worker earning say $600 a week will typically get a UI benefit of $300. When $600 is added to the standard UI benefit, this worker now gets $900. Businesses now claim that such workers have no incentive to come back to work. And yet, a worker earning $1200 a week will only get the $504 plus the $600, which is still less than that worker’s previous weekly wages.

If the current recession were a garden variety recession due to typical fluctuations in a business cycle, critics of the enhanced payment would certainly have a point. This recession, however, is a function of government ordered shutdowns in response to a pandemic. Moreover, reopening the economy will not ensure that workers will be called back to work, especially if they are not allowed to operate a full capacity. Arguably, workers receiving more in weekly income should be entitled to it precisely because they were locked out of their jobs due to governmental actions.

If there is no demand for goods and services, employers generally have no need to call workers back. If we are haggling over $600 a week, then the current UI system is in serious need of an overhaul. New York which wants to be known as a progressive state is quite backwards when it comes to UI benefits. The maximum benefit in New Jersey is $681 and the maximum benefit in Massachusetts $823. Meanwhile, there are any number of workers who are earning more than $1000 a week for whom the reservation wage would not apply.

The real problem is that if businesses cannot operate at full capacity, then they really have no need to hire all their workers back. Even if they could, they still may not need as many workers until consumers are comfortable enough venturing into business establishments such as malls and restaurants.

Perhaps Republicans in Congress simply did not get the memo that the economic consequences from this pandemic have not fallen evenly. The real critics of this enhancement haven’t really suffered any income loss, as most of them enjoy the luxury of remote work. Those who have suffered the economic effects are disproportionately low-skilled and low-wage workers, many of whom are workers of color. Given that, it seems a bit odd that Republicans would effectively be showcasing as the measure of economic success jobs that really don’t pay well.

It is almost as though they really think the goal ought to be a low-wage economy, and that the only way to ensure its survival is to force workers to accept whatever poor paying jobs really exist. If anything, this crisis only highlights what is wrong with the UI system. First of all, it replaces too little for lost wages. The typical replacement rate is 50 percent up to the state’s maximum. In Germany, for example, it is 60 percent and 67 percent if there are children. In France it is 57 percent, and in Sweden it is 80 percent in the first 100 days and then 70 percent for the next 200 days.

For those at the high end of the income scale in the U.S. there is certainly no incentive not to work and for those at the low end, there is insufficient replacement income to meet one’s basic living expenses. Again, there is no real incentive not to work. Ideally, the U.S. should have a UI system where workers receive 75 percent of their previous income in all states, and then there would be no need for enhanced UI payments, or for $1200 stimulus checks for that matter. To simply give these checks to those who haven’t lost their jobs is wasteful.

Now let’s talk about why workers are entitled to the enhanced payment, even if they are getting more from non-work. These are workers who lost their jobs because of actions taken by public officials. It wasn’t simply a downturn in the business cycle. Rather, if we recognized workers’ labor as a form of property, government has effectively taken their property without just compensation. From a moral standpoint, the extended payment represents a form of compensation, and perhaps tacit recognition that something was stolen from them.

Most people would prefer to work because their identity and sense of self-worth is wrapped up in the autonomy they have from going to work. To believe that workers are not looking for work because of the reservation wage is absolutely absurd on its face. They aren’t looking for work because we are in a pandemic and there are no jobs to be had at the moment. And because the coronavirus will be with us for some time — at least until a vaccine is developed and widely distributed — many businesses will not be operating at full capacity which means that many will continue to be unemployed.

When an employer claims that the enhanced benefit makes it difficult to hire workers, that employer is making an excuse. If that is a concern, then employers should pay their workers more. A higher UI benefit might force employers at the bottom end to pay their workers more because the ratables they pay into the system would go up. They actually would have less incentive to simply lay workers off. Under normal circumstances, employers might have incentive to rely more on furloughs and time shares, i.e, with hours cut and the difference made up in UI benefits.

Since the ultimate source of recessions, i.e, normal ones, is a lack of aggregate demand, higher wage replacement rates will help unemployed workers continue to demand goods and services, which could hasten recovery. But given the disproportionate impact the economic shutdowns have had on low-wage workers, the Republicans’ position is somewhat mystifying. Or given the protests for racial justice at the moment amid economic injustice and rising inequality, the Republicans’ position just boggles the mind.

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