The problems facing Minnesota’s small businesses: higher welfare

In April, I had an op-ed in the Star Tribune titled: ‘A new unemployment problem: it pays too well.’ In it, I noted the phenomenon of elevated levels of unemployment coexisting with record numbers of job openings. I argued that one factor causing this was the federal ‘enhancement’ of unemployment insurance, which means that, in Minnesota, you can earn the equivalent of $26 an hour not working. Lots of businesses cannot compete with that government ‘wage’.

One response was that I made this argument “with no evidence”: “Employers are quoted but not workers,” it said.

Evidence to support my contention is, in fact, emerging. The latest comes from a survey by the U.S. Chamber of Commerce. Among its findings are that:

Half (49%) of Americans who became unemployed during the pandemic say they are not actively or not very actively looking for work; less than a third (32%) report that they are strongly active in their job search.

Six in 10 respondents (61%) say they are in no hurry to return to work. Three in 10 (30%) say they do not expect to return to work this year, with nearly half of those (13% of the total) saying they never plan to return to work. 

One in eight (13%) who became unemployed during the pandemic and remain unemployed have turned down at least one job offer in the past year.

One in six not actively seeking work (16%) say the amount of money they are receiving from unemployment benefits and government programs makes it “not worth looking” for work. 

Even more–28 percent of survey respondents–agree that “There are a lot of people who are not looking for work because they can do almost or just as well collecting unemployment benefits.”

While the survey also finds that childcare and other family care needs, a lack of available jobs in sectors that are still suffering, and continued COVID-19 concerns are responsible for some of this continued voluntary unemployment, when we do quote the workers they do, indeed, say that ‘enhanced’ unemployment benefits are a factor in their choice not to return to work.

To see what this means in practice, see the message below, posted on Facebook recently:

Some would say “They should just pay them more.” But businesses cannot simply yank the wages they offer up to any level they like. They will certainly not raise the wage they offer to a level above what they estimate the employee will add to turnover — if they did, they would be adding more to their costs than to their revenues, something no business would do: this is what I call the real iron law of wages.

So, if a Minnesota business thinks that a worker will add only, say, $20 an hour to their revenues, they will not offer them a wage above that. And, if that worker can make $26 an hour not working, many will, quite sensibly, choose that option and the hire will not take place.

I wrote yesterday about how higher crime was putting pressure on our state’s businesses: so, too, is higher welfare.

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