How to slow the recovery.
The Biden plan should provide enough relief to carry the economy through the worst of the pandemic. One concrete example is the supplemental unemployment benefit, which Mr. Biden proposes to increase from $300 a week to $400. More important, the extra benefits will last at least through September, then phase out automatically as the labor market improves. Both changes are wise. (emphasis added)
This is from Alan S. Blinder, “Biden’s Stimulus Hits All the Right Notes,” Wall Street Journal, January 20, 2021 (print edition.) The article is gated.
With federal benefits of $400 per week, this translates into $10 an hour for a 40-hour week. That’s on top of state unemployment insurance benefits, which are typically somewhere between $250 and $500 per week. Take even the low end of $250 and that translates into $6.25 per hour for a 40-hour week. So that’s $16.25 an hour. Although unemployment benefits are subject to income taxation, they are not subject to payroll taxes. The employee’s share of payroll taxes is 7.65 percent. So to break even by taking a job, a worker getting $16.25 per hour for not working would have to get at least $16.25/(1 – 0.0765) = $17.60 for working. And if the worker wants to net at least, say, $3 an hour before tax (but after payroll tax) for working, he would have to be paid at least $20.84 for working.
But that very fact means that a few million people, especially those making below $20 an hour, will take their time getting a job. That means that the labor market improvement that Blinder depends on, though it will happen, will be slower than otherwise precisely because of the extra $400 per week. Thus the title of this post.
Blinder claims that this policy is wise; it is anything but.
READER COMMENTS
Jon Murphy
Jan 27 2021 at 6:45am
By way of anecdote: a family member of mine was laid off for pandemic reasons last summer. With the extra $600 on top of regular UI, they had more income during the summer than they did by working.
Michael W
Jan 27 2021 at 9:06am
Much to my dismay, I too had a family member that enjoyed (and continues to enjoy) a life lived largely on expanded UI. It’s not helping this otherwise able-bodied, intelligent individual move on.
zeke5123
Jan 27 2021 at 10:43am
It is likely also killing this person’s future job prospects. There is a hidden cost to this extra UI.
Thomas Hutcheson
Jan 28 2021 at 6:22am
Excellent example of why we need a normal UI system that replaces a healthy portion <100% of lost income plus health insurance instead of a one-off scheme for the recession of the year.
Tony
Jan 28 2021 at 10:26pm
I had an employee like that. It took the threat of hiring someone else to fill the position *permanently* to bring them back to work when we reopened.
Thomas Hutcheson
Jan 27 2021 at 7:01am
It would certainly be better if UI were one single Federally financed program (state programs are financed with wage taxes and expenditures rise just when revenues fall creating deficits for entities with borrowing constraints) that provided a healthy proportion of lost income with automatic access to health insurance. I agree that this will cause unemployed workers to be more choosy about what jobs to take as the labor market improves relative to UI that provided a lower proportion of lost income and health insurance. So this is a case where there is an efficiency/redistribution trade-off.
It would be good if we had an estimate of how steep the trade off is. Like the minimum wage case, pointing out that there IS a trade-off is not news and not helpful in thinking about how much redistribution to do.
[I suppose that at least part of Binder’s judgement about wisdom was based on was tying the benefit to the state of the labor market, rather than an arbitrary date.]
nobody.really
Jan 27 2021 at 12:56pm
Henderson offers a traditional analysis of policies for addressing recessions–an analysis that takes no account of the pandemic. Since we’re in a pandemic, I find this analysis incomplete.
To review: Government is trying to control the spread of a disease, and accordingly asks people to maintain social distance. The added unemployment benefits are intended to make it easier for workers to comply with these policies (where they have a choice to work or not), and to bear the burdens of these policies (when they forego some or all of their income). In short, the pay-off of the policy does not derive solely from stimulus; it derives from disease control.
Which would be worse for the labor market: The added unemployment benefits, or a prolonged spread of COVID (including its ever more virulent strains) when workers conclude that they must ignore social distancing policies in order to earn an income? The answer is far from clear to me.
Jon Murphy
Jan 27 2021 at 1:07pm
Problem: you’re reading in a goal that is explicitly not in the policy proposal. The proposal has nothing to do with social distancing. Indeed, it would likely exacerbate the spread of the virus by keeping people contained. Furthermore, by phasing out UI, the problem David discusses remains.
So, even if we ignore the stated intention of the policy and substitute in your intention, the policy still fails.
Dylan
Jan 27 2021 at 3:31pm
Jon,
At least last spring, when the first package passed, that was explicitly the goal of the expanded UI. I’ve previously posted links to quotes from reps stating this. I don’t know if the reasons have changed for this round, I haven’t kept up all that much, but keeping people at home certainly seems to be the goal of many other actions that governments are taking related to COVID, so I have trouble thinking that the goal is the opposite in this case.
Jon Murphy
Jan 27 2021 at 4:12pm
I do not recall the links. But I do recall the standard “stimulus” argument and the “need to help people during the pandemic” argument.
nobody.really
Jan 27 2021 at 3:51pm
Not following this.
Jon Murphy
Jan 27 2021 at 4:11pm
Tracking evidence shows spread is caused by household transmission, not workplace or public
nobody.really
Jan 27 2021 at 4:54pm
1: Any theories about how COVID gets into households?
2: Imagine data reveal that most car accidents occur within three blocks of a person’s home; would you conclude that people could reduce car accidents by parking more than three blocks from their homes? Imagine data reveal that people often die in proximity to health care providers; would you conclude that people will tend to prolong their lives by avoiding health care providers?
In short, even if you have found an accurate correlation, I don’t draw the same policy conclusions you do.
AMT
Jan 27 2021 at 9:29pm
I have to agree with nobody.really here. There is a necessary precondition here. To give you another example, which would you rather eliminate patient zero’s illness, who first contracted Covid-19 and subsequently passes it to just two people (hypothetically, but the number isn’t that important), or one super spreader later, who infects 100? According to your analysis you would say the super spreader is worse because 100>2. But the problem is every single one of the millions of Covid-19 cases (including that super spreader) derive from patient zero. If you eliminate that prior event, you also eliminate everything that follows. If you eliminate the transmission between households, you will necessarily eliminate the transmission within households, because they can only end up occurring if there is spread between households.
Another example, “the vast majority of the Salmonella bacteria in this individual grew after a relatively small number of the bacteria cells entered their body, so growth inside the body is the real problem.” I don’t think that’s the best way to look at it.
nobody.really
Jan 28 2021 at 9:49am
I have to commend bold thinking–defending a position that nobody.really agrees with.
Comments are closed.