Job Destruction

Normally, we're not big fans of enhanced unemployment benefits. But the current severe economic contraction brought about by the Coronavirus and the government-mandated shutdowns of businesses meant to stop the disease is a completely different animal from a normal recession. It's not just that people are staying away from certain economic activities because of the virus: the government is requiring businesses to shut down, magnifying job losses across the country.

Initial jobless claims averaged 216,000 per week in the four weeks ending on March 7, before the shutdowns. That's a total of 863,000, which was very low by historical standards, particularly relative to the size of the labor force. In the four weeks since then, 17.1 million workers have filed claims, blowing away previous records.

Many of these layoffs 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 US 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 over-kill for many workers, leading to perverse incentives. For example, let's take a worker in California earning $46,700 per year. Normally, a layoff would give them six months of unemployment benefits at a rate of $450 per week, which is an annual benefit rate of $23,500, about half of what they were earning when they worked.

But Congress is now throwing in an extra $600 per week for unemployed workers, for four months. That means for four months these workers will get $1,050 in benefits per week, which translates into an annual benefit rate of $54,600, which is even more than they were earning when they were working!

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's 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.