Higher unemployment benefits are not ‘the free market at work’

Recently, I wrote an op-ed for the Star Tribune that argued that increased unemployment benefits are preventing employers from hiring.

Most agree that there is an unusual situation in Minnesota’s labor market at present, with lots of people unemployed and at the same time as there are lost of jobs available. The Star Tribune reported recently:

“No one has ever seen a moment like this with high unemployment and high job vacancy at the same time,” said Elena Foshay, Duluth’s director of workforce development. “It’s definitely a puzzle.”

On Tuesday, KSTP quoted DEED Commissioner Steve Grove:

“You’ve got a unique situation right now where you’ve got a good number of folks on unemployment insurance right now, over 200,000, yet you have over 100,000 job vacancies in the state,” Grove said. “And a lot of them are struggling to find workers.”

In my Star Tribune piece, I argued that:

In part, this willing worker shortage is due to lingering fears of catching COVID-19 in the workplace. Some parents also face child care problems because their kids’ schools remain shut.

But increased unemployment benefits are also a part of the picture. KSTP quoted Jason Miller, who has been a server for 16 years:

Miller told 5 EYEWITNESS NEWS the additional $300 and $600 per week unemployment payments during the pandemic have helped during this time. He also believes that may be contributing to the reduced workforce.

“Some people are making more on unemployment,” Miller said. “That’s why they haven’t gone back yet because there aren’t all the hours for people. Nothing is expected to be normal right now.”

This drew some response. The tweet below is an example of the most common reply:

Sadly, serious people make such arguments too. A former member of President Obama’s Council of Economic Advisers tweeted this week:

Well, yes, they have, as my colleague Martha Njolomole noted yesterday. Kare 11 reports:

Businesses are doing what they can to recruit and retain workers.

“We’re doing incentives for our staff that if they bring somebody in and they make it 90 days we’ll give them 500 dollars,” said [owner of four restaurants in St. Paul, Brian] Ingram. 

I am all for higher wages, but they need to be sustainable rises driven by market forces and not conjuring tricks from a legislator’s pen. As I’ve written before, “Markets have within them mechanisms to raise wages.” This happens when employment increases, “workers are relatively scarce, and employers need to bid against each other to hire them.”

But there is a big difference between companies finding it hard to hire because the labor market is tight and them finding it hard to hire because unemployment insurance pays so well. The former is sustainable, the latter is not. The government paying people more not to work than an employer can afford to pay them to work is not “free market” in the slightest.

John Phelan is an economist at the Center of the American Experiment.