Many of the layoffs these past weeks were the direct result of the government forcing businesses to shut their doors. When people are being deprived of their livelihoods by government fiat, it resembles a “taking” under the Fifth Amendment of the U.S. Constitution. In this unique situation, unemployment compensation resembles a just compensation for that taking.
The problem is that the boost to unemployment benefits enacted by Congress is overkill for many workers, leading to perverse incentives.
Because the extra $600 is a flat extra benefit, the gap between what unemployed workers can get now versus what they were earning when they worked is even larger for lower-earning workers. And it is not just deep-blue states like California. In Texas, for example, unemployed workers who previously earned up to $58,000 per year will be better off unemployed, at least for the first four months.
Now think of what this means when we re-open the economy. Some workers will go back to work because they might fear their job disappearing if they hold out. But many will not want to give up the higher payments, and businesses will now be competing with government for workers at the same time they are digging out of a huge financial hole. In fact, many low margin businesses may not be able to afford those higher wages.
Do not get us wrong; we like faster wage growth. What we do not like are government policies that create perverse incentives to avoid work once it becomes more available.
If bad policies drive wage increases, it makes it tough for businesses to hire, which leads to a more prolonged surge in unemployment and a slower return to the standard of living we had before COVID-19.
Early in the Great Depression, the Hoover administration urged companies to maintain wages in spite of deflation. The idea was that if wages were kept high, workers would have more purchasing power, which would boost output. But workers were already getting a boost from falling prices, and firms that kept wages high would not hire new workers. It made the Depression worse.
By boosting unemployment benefits, the government has put businesses in a position where they have to boost wages, indirectly making the same mistake as President Hoover.
Brian S. Wesbury is chief economist and Bob Stein is deputy chief economist at First Trust. Their column appeared in Monday Morning Outlook. Read it in its entirety at FarmEquip.org/$600.