🔺By Design, Unemployment Benefits Do Not Incentivize Unemployment

There is a general misunderstanding among large swaths of the populace who believe that people receive unemployment benefits that are greater than what they earn if they were working which incentivizes further unemployment. By design, unemployment benefits are a part of the social safety net and do not incentivize further unemployment.

For starters, without looking at the dynamics of the unemployment benefit system, just realizing that the current model for prosperity requires continuous growth indicates that nobody would devise a policy whereby it is incentivized to not grow. Therefore, it follows that the unemployment benefit scheme is structured in such a way so as to provide relief temporarily while not stifling growth indefinitely. Let’s take a closer look….

Unemployment benefits are paid from payroll taxes. The benefit is typically for 26 weeks and is usually half of what was earned with caps in place. Many states require recipients to send in a minimum level of job applications to continue to receive benefits as well. This mechanism does not incentivize unemployment by any means.

However, as a result of COVID and the CARES Act, people were receiving more in benefits compared with when they were working. This is because it was an emergency measure that was applied unilaterally and many workers who lost their jobs were in lower-end paying jobs such as janitorial services, etc. Additionally, the States’ computer systems were overwhelmed by the demand for unemployment benefits. Also, in some instances, they (beneficiaries) might be making more staying at home as compared with an essential worker, which is why many have suggested hazard pay for essential workers. Despite receiving more in unemployment benefits compared with when they were working, there is not any indication this has increased unemployment. In fact, the number of unemployed is still greater than the number of job openings.

As the initial shock from unemployment has leveled-off somewhat, a more nuanced and targeted unemployment package can be created that is more in-line with previous earnings to make citizens whole given the circumstances. The mechanism would revert back to its original systematic design once conditions normalize.

Published by Diamond1

I have an extensive background throughout the financial spectrum with high-level experience on the sell-side, high-net worth private banking, portfolio management, international finance, public pensions, VC, PE, and economics. I enjoy working and collaborating with people that I admire and trust.

"Fit Models to Problems, Not Problems to Models"

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