A new unemployment problem: it pays too well

As Minnesota's economy slowly begins to recover from COVID-19 and the measures taken by state government to fight it, a problem we face is getting people back to work.

Atlas Staffing recently reported having 241 open jobs on its site for locations across Minnesota. But, according to Minneapolis office manager Alison Barge, it is "next to impossible" to fill those positions.

Most of the jobs are entry-level positions, so it isn't a skills gap, and some employers are offering a $3/hour incentive, boosting pay to $17 an hour, flexible scheduling and part-time options. Even so, Barge says, people just "don't want to work."

Across the United States, the National Federation of Independent Business surveyed more than 500 small businesses recently and reported that 42% of them had job openings they couldn't fill.

"As long as we've been conducting the survey, it's never been that high," said Holly Wade, executive director of NFIB's research center.

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 another issue is that many can earn more money by not working.

Part of the federal government's response to COVID-19 in spring 2020 was to enhance unemployment benefits with an extra $600 a week through July 2020, over and above the usual state-administered unemployment payments. A working paper by the National Bureau of Economic Research found that 76% of those eligible for the $600 bonus could collect at least as much for being jobless as they'd earn by working.

The enhancement has since been cut to $300 a week, extended to September 2021. University of Chicago economist Peter Ganong says that even with the supplemental benefit halved to $300, "42% of [unemployed] workers are making more than their pre-unemployment wage."

What this means in Minnesota is that, with the initial enhancement, unemployed Minnesotans were able to collect a maximum weekly benefit of $1,340 and now get up to $1,040 — the equivalent of $33.50 an hour and $26 an hour. This goes a long way toward explaining why the Minnesota Department of Employment and Economic Development says that there are over 100,000 job postings in the state while, at the same time, the Bureau of Labor Statistics' Local Area Unemployment Statistics show that there were 9,700 fewer Minnesotans employed in March 2021 than there were in September 2020.

If unemployment insurance offers people an income comparable to working — or even greater — many of them will quite sensibly opt not to work.

Whatever the merits were of enhancing and extending unemployment benefits when the pandemic hit and unemployment skyrocketed, those extraordinary measures must be wound down as more Americans are vaccinated and as more states lift their COVID-19 restrictions. There should be no more stimulus payments and the enhancements and extensions to unemployment benefits should be phased out. If they are not, we risk a prolonged period of increased unemployment.

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