Sorry, Scrooges, But the Claim That Unemployment Benefits Keep People from Working Is Humbug

Steve Herzenberg |

When it comes to working people, most big corporations love the stick but can’t abide the carrot—like Scrooge before he was visited by several ghosts. Business advocates want people to work at terrible jobs and stay impoverished, not work at good jobs that pay well.

In the short run, driving down wages is good for businesses, especially the biggest, because it raises their profits. But in the long term it hurts everyone. As Henry Ford figured out a century ago, if people work for low wages, they can’t buy what businesses, large and small, are selling, and the economy slows down.

Nowhere is the miserliness of big-business conservatives more apparent than in their attacks on unemployment insurance. They were horrified when Congress extended pandemic unemployment benefits this March. (For details on pandemic unemployment benefits, see pp. 21-23 in “The State of Working Pennsylvania 2021.”) In response, big business and its allies threw a nation-wide hissy fit. Where Republicans controlled power at the state level, they gleefully cut off the extra federal benefits early, depriving their states of income and buying power and, in the process, hurting their own economies and the small businesses they purport to love.

What big business saw as the abominable generosity of unemployment benefits ended at the start of September. As a result, workers by the millions poured back to the factory gates, and to retail stores and restaurants with “help wanted” signs.

Wait? That’s not what happened?

No, it’s not what happened. There was no significant change in the pace of job creation in September when unemployment benefits were reduced or ended. And recently released data show that states that maintained the additional $300 weekly unemployment payment from May to September saw faster growth in their workforces than those that cut off the payments.

If it’s not generous unemployment benefits, why are so many businesses having a hard time finding workers?

Two big factors are the pandemic and the lack of child care. Some workers are reluctant to go back to work because they or their family members are vulnerable to COVID-19. Other potential workers are struggling to find child care, including care for school-age children that might get sent home for COVID-related reasons.

If we were to eliminate unemployment benefits—big businesses can dream, can’t they?—the pandemic and lack of child care would still keep people out of the job market.

In the long run, it turns out that the carrot matters more than the stick to people returning to work in the modern economy. In an age of relative prosperity and two-career families, many potential workers don’t have to work, or at least to work full-time, to survive. Some can choose to stay home to take care of their children or elderly relatives and save money on home care, work clothing, and commuting. Others may decide that they value free time over unpleasant jobs at low wages.

To encourage those workers to take jobs, they need strong incentives—a carrot, not a stick. They need jobs that pay well, provide good benefits, and give them respect and a path towards better jobs in the future.

This is not a new phenomenon in our economy.

In the second half of the 1960s, our unemployment system was more generous—at least for men in traditional employment relationships, which were most workers at that time. In addition, the national unemployment rate was below 4%.

With new jobs easy to find, men in the 1960s could have cycled in and out of jobs, alternating periods of unemployment—and time off—with work. But they didn’t: 95 of every 100 prime-age men worked, attracted by high-wage union jobs, many in manufacturing, and by the respect given to working people in that age of shared prosperity.

The share of prime working-age (aged 25-54) men in the labor market during this period was stable because they were offered good jobs at good wages.

Today, the same logic applies. If you want more people to work, our society and individual businesses should try the carrot. If our society expands child care, pre-school, and paid family and medical leave—so women (and some men) don’t have to quit their job when they must care for a family member—more people will work. If businesses pay workers more and treat them respectfully on the job, more people will work.

Over the entire history of modern industrialism in the United States and Europe, there’s a large body of evidence that good jobs and generous unemployment benefits create economies with low unemployment and high shares of adults that work. And that not only helps individual businesses but, as we pointed out above, creates a dynamic, growing economy for all. Putting money in the pockets of a growing middle-class is the most reliable way to sustain and accelerate economic growth.

In fact, before we had unemployment benefits at all—or a minimum wage or unions—the U.S. economy was in recession nearly half the time. That wasn’t good for businesses or for working families. The economy was prone to recession because cutting wages and jobs—the natural reaction of businesses losing customers and seeing profits decline—led to downward spirals of consumption and business sales. Policymakers created unemployment insurance so that unemployed workers and their families could keep buying stuff, making a downward spiral less likely.

We understand why the Ebenezer Scrooges who represent our corporations complain about unemployment insurance and other social benefits. These policies result in higher wages. But even if high wages reduce profits in the near term, they are the best way to get more people into jobs. And over the long term, good wages and high levels of consumption benefit everyone, including by boosting profits.

Now that the new jobs numbers have confirmed that cutting unemployment benefits won’t drive people back to work, policymakers can ignore the Ebenezer Scrooges in our business community—maybe one day they will wake up to the reality that being a bit more generous is good for them, too, because it leads to a virtuous circle of rising wages, increasing demand, and economic growth.

Meanwhile, since a robust unemployment insurance system benefits everyone and can lead to more people working policymakers should make permanent some of the improvements to benefits temporarily enacted during the pandemic. For example, the federal government should automatically extend benefits when unemployment rises, rather than requiring Congress to act each time we slip into recession.