How to Fix a Perverse Coronavirus Incentive and Get More Americans Back to Work

If you were laid off from your job, and you could collect more from unemployment benefits than you could get from being rehired at your regular pay, would you go back to work at your old employer if they called you with an offer to go back to work?

In that situation, many people would turn down the offer to go back to work.

This scenario is an example of a perverse incentive, one recently created by the U.S. Congress when it rushed through the CARES Act relief package for Americans impacted by job loss from the coronavirus pandemic.

Here, politicians sought to provide more generous unemployment benefits to middle-income earning workers who were forced out of work when state and local governments ordered the closure of businesses to limit the spread of viral infections, so they would be able to continue paying their relatively higher bills as they were prevented from working. The federal government would provide funds to allow states to increase the amount of their unemployment benefits by $600 per week, on top of their state’s regular unemployment compensation, all the way through July 31.

Sounds reasonable, right? Except that Congress extended the additional unemployment benefit to all unemployed Americans, even those whose regular pay falls at the very lowest end of the income spectrum. For them, the additional unemployment benefit on top of their regular unemployment compensation can be more than enough to cover their regular living expenses, making it a huge windfall.

So now, as businesses are now being allowed to reopen, many that employ low-income workers who are now making bank from Uncle Sam’s super generous unemployment scheme are having trouble getting them to agree to come back to work, because for them, going back to work now would mean losing their new guaranteed welfare cash cow.

Worse, because they have that perverse incentive, the nation’s unemployment numbers are certain to remain elevated until the extra cash benefit runs out on July 31, needlessly forcing the government to borrow money to provide the benefit and slowing the nation’s economic recovery through that date.

Responsible politicians are now looking to correct the perverse incentive they created. The question is how can they fix the incentive problem without costing the government or the economy more in the process.

Opinion columnist Jazz Shaw has some thoughts on how to go about fixing the perverse incentives:

… the Senate should probably be considering a modified program that incentivizes the largest number of people returning to work as can safely do so while still maintaining some level of support for those who honestly lost their jobs due to government decisions and have no option to return yet.

Each person applying for these benefits should be able to show that they did in fact lose their job because of the pandemic and that the employer is not currently hiring for their position. The states should be able to verify this easily enough as part of the application process. Any states unwilling to participate could be dropped out of the federal benefits enhancement program. (And their elected officials would find themselves facing an angry mob if they failed to comply.)

Just taking those two steps would likely produce a number of desirable effects. The total amount of additional debt being run up in Washington would be reduced. Employers would be more likely to get their former, experienced employees back on the job more reliably. And as more people return to work, consumer confidence and demand would start returning to previous levels.

I would suggest adding a third step. Since the U.S. government has already borrowed the money, it might consider converting what is set to be a very generous reward for being unemployed for a prolonged period of time, to instead be the equivalent of a signing bonus for going back to work, paying the extra amount that the unemployed would have otherwise collected in unemployment out through July 31 as a lump sum once they are back working.

Instead of flushing more borrowed money down another government-created welfare trap, the government, through that additional step, could transform what is proving to be a very bad decision into an investment that instead provides a positive return for all Americans. The unemployed win, employers win, and the economy grows faster than it would if politicians let the perverse incentive they created continue without reform.

Craig Eyermann is a Research Fellow at the Independent Institute.
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