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High unemployment is what the economy ends up with when unemployment pays more than going to work

I have written before regarding the issue of restaurants having to compete with unemployment in order to attract workers. This is usually a big problem with unemployment insurance programs. But the pandemic stands to make this problem worse because unemployment payouts are much higher than wages, especially at a time when small businesses need workers to return to work in order for the economy to recover.

Roughly 40% of workers are theoretically poised to make more from unemployment than they do at their regular jobs. This is a good enough incentive to drive anyone to stay at home. Of course there is already a health risk incentive driving people to stay home, as they should. But giving people more than 100% extra more money than they make at work is not going to come with no consequences to long run employment. And that is where the issue lies.

During normal times unemployment is usually less than half of a worker’s wage. This is meant to provide financial support while giving an incentive for workers to look for work. But these payments are for some people high enough to dissuade them from looking for work. Now the payouts have been raised, and face the possibility of being extended once they expire in July. Would someone who earns $900 weekly being unemployed willingly go back to a job where they earn significantly less?

Very few people would willingly make that choice and we are already seeing the consequences of that.While businesses are opening up, smaller businesses are having a hard time attracting workers to go back. Some restaurants for instance are more reluctant to ask their workers to return. This is because they know, at this particular moment in time they cannot afford to pay their workers more than unemployment is paying them.

While there is a need to cushion workers from financial loss that comes with unemployment, there is a risk that come with giving people money while they stay at home; they will not have much need to earn money by working. This risk is there whether there is a pandemic or not. But that risk was magnified when the employment payouts were especially increased by a large margin. And this might become a problem for small businesses who cannot afford to pay their workers more.




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