To address labor shortages, Congress should try a return-to-work bonus

With employers struggling to fill jobs, there is a growing concern that the $300 weekly unemployment insurance bonus is incentivizing workers to stay home. In some states, the $300 bonus on top of regular unemployment benefits exceeds the average wage. Converting the $300 stay-at-home bonus into a return-to-work bonus will jumpstart the labor market. 

Included as part of the CARES Act of 2020, the extra unemployment payment originally provided $600 per week on top of regular state unemployment benefits. At a time when the economy was in freefall, this $600 provided much needed financial relief to millions of Americans and served as a buffer against the rapid economic collapse. From the beginning, however, there was concern that a majority of recipients took home more income from unemployment benefits than from work. A University of Chicago study estimated that 76 percent of recipients earned more from unemployment with the extra payment than from their previous job. 

When businesses started to reopen, many found workers unwilling to return. Concerned that unemployment benefits were deterring job searches, Congress reduced the weekly supplemental payment to $300 in March as part of the American Rescue Plan Act of 2021. But, with the 559,000 jobs added in May — below expectations yet again — stagnant labor force participation, and a record 9.3 million jobs unfilled, too many people are still sitting on the sidelines, restraining the economic recovery. 

While a range of factors — including caregiving responsibilities and general fear of the virus — have prevented many from returning to work, the extra unemployment payment is likely playing an outsized role. Even at $300 per week, an estimated 37 percent of the workforce could make more on unemployment now than by working — the rate is even higher for the segments of the population where unemployment remains most elevated. Moreover, new research suggests that child care center and school closures are not having as big of an effect on employment as many believed, further highlighting that the unemployment bonus could be a major contributor to the current labor shortage.

The $300 supplement is set to expire at the beginning of September, but the United States cannot wait until then for workers to return. The U.S. labor market and, more broadly, the economic recovery are at a pivotal point: With the vaccinated population rising by the day, COVID restrictions loosening and businesses reopening, companies are now looking to hire millions of workers. In the next couple of months, it will be critical to have a set of policies in place that support rather than continue to delay the recovery.

It may be tempting to accelerate the expiration of the benefit supplement (like many states are doing), but the Democratic Congress and Biden administration are unlikely to support this movement. Additionally, simply removing the extra unemployment payment early would pull the rug out from families at a time when many Americans are still getting vaccinated, concerned about the virus and unable to find suitable child care.

Rather, Congress should enact a temporary return-to-work bonus until the $300 supplement expires in September. Here’s how it would work for the next few months: Any worker on unemployment would continue to receive the $300 supplement until September. Those who accept a new job and leave unemployment, however, would receive a lump-sum payment equivalent to the lesser of $1,200 — the equivalent of four weeks of the $300 supplement — or the total remaining supplement to which they would be entitled. Between the continued $300 supplement and the new $1,200 bonus, unemployment insurance would continue to provide adequate financial support until September while the bonus offsets the work disincentive for those able to work but currently choosing not to do so because their current benefit is greater than their new paycheck. Rep. Kevin Brady (R-Texas), Sen. Mike Crapo (R-Idaho) and a number of governors are advancing similar proposals that merit serious consideration.

Unemployment benefits were never designed to provide a greater benefit than working — nor to “compete” with employers for workers. Unemployment is an insurance program that acts as a temporary bridge between jobs by providing needed income for those who are jobless through no fault of their own. The extraordinary pandemic necessitated extraordinary financial relief, but now that the country is reopening, it’s time to return to work.

Jason Fichtner is vice president and chief economist of the Bipartisan Policy Center. Ben Gitis is a senior policy analyst at the Bipartisan Policy Center. Follow them on Twitter: @JJFichtner @BenGitis