, Republicans warned that the unemployment provision could create a perverse incentive. In many cases, the CARES Act would pay workers more on unemployment than they made when they had jobs, thus incentivizing people not to return to work. Sen. Bernie Sanders (I-Vt.) dismissed their concerns as “anti-worker,” but recent news has proven the Republicans correct: paying workers more in unemployment than they made on payroll is anti-work.
The CARES Act gave the unemployed an extra $600 per week during the coronavirus crisis. This may sound like a charitable measure, especially given the fact that 4.4 million Americans applied for unemployment benefits last week.
As Sen. Ben Sasse (R-Neb.) warned, however, this extra windfall could incentivize people not to work. “The American people do not think you should get paid more money to not work than to work, and the American people understand the stated purposes of this bill are to maintain the employer-employee relationship,” Sasse insisted. “If we do something now that says the new baseline American assumption is the government should say … we want people to get more money to not work than to work, the American people do not want that to happen.”
Liberal naysayers like The New York Times‘s Binjamin Appelbaum insisted that the program could not be abused because “YOU CAN’T GET UNEMPLOYMENT BENEFITS BY LEAVING YOUR JOB VOLUNTARILY.”
Then reality came and smacked their arguments in the face.
Jamie Black-Lewis, who owns two salons in Washington State, had to suspend pay for 35 employees, including herself, when the state government ordered non-essential businesses to suspend operations to stop the spread of the coronavirus. She applied for small business loans through the Paycheck Protection Program and received $177,000 and $43,800 — on the conditions that the bulk of the funds must go toward payroll, that salaries must remain intact, and that employee headcount must not decrease.
Yet when Black-Lewis told her employees the good news that she would pay them even without them returning to work, they got angry. “It was a firestorm of hatred about the situation,” the small-business owner told CNBC.
Her employees discovered they would make more money on unemployment, so receiving their old paychecks would actually be a pay-cut — even when they were not required to work!
“It’s a windfall they see coming,” Black-Lewis said of the extra unemployment payments. “In their mind, I took it away.”
“I couldn’t believe it,” she added. “On what planet am I competing with unemployment?”
CNBC called the workers’ animosity an “unintended consequence” of the CARES Act, but Senate Democrats actually celebrated the extra unemployment payments. In fact, this might be a wedge for the government to force employers to increase wages artificially. Sure, it’s no federal mandate to raise the minimum wage to $15/hour — which House Speaker Nancy Pelosi (D-Calif.) tried to smuggle into the CARES Act — but it may actually have a similarly large impact on wages.
On Wednesday, Kurt Huffman, owner of the restaurant ChefStable, took to The Wall Street Journal to explain the practical effect of the extra $600/week in unemployment.
“The starting wage for a line cook in one of our restaurants is $15 an hour. These cooks receive at least $1 an hour in tips, so at a minimum they make $16 an hour, or $640 before taxes for a 40-hour week. The overwhelming majority of our laid-off cooks qualified for Oregon unemployment compensation of 1.25% of their annual gross wages weekly, or $416 in our example. The extra $224 a week provides a strong incentive to return to work,” Huffman explained.
“But as of this week, that same employee receives $1,016 a week, or $376 more than he made as a full time employee. Why on earth would he want to come back to work?”
Why, indeed? Unless employers pony up the cash and pay more.
“This has had the perverse effect of making it impossible for us to hire enough people even for our limited takeout and delivery business at a time of rapidly rising unemployment,” Huffman reported. “It will be an even bigger problem once we are allowed to reopen our dining rooms. And it will persist at least until July 31, when the unemployment bonus expires. I’d have to offer my cooks $25.40 an hour to match what the government is paying them not to work.”
Reopening is much more difficult given the unemployment increase. “The Trump administration is talking about setting a timeline for when the country can ‘open for business.’ For my business, Congress has already locked down that date,” Huffman wrote.
In order for businesses to return to normal, they need to rehire the employees they had to lay off during the crisis. Thanks to the extra $600/week in unemployment, laid-off workers have an incentive not to return to work.
Yet Democrats both fought for and celebrated this perverse program. Sanders threatened to torpedo the entire bailout bill in order to save this provision.
Kurt Huffman’s experience might explain why Democrats insisted on adding an extra $600/week to unemployment benefits. There’s the slightest chance this may not have been an “unintended consequence” at all. After all, Rep. Alexandria Ocasio-Cortez (D-N.Y.) has called on workers to strike — at a time when 4.4 million Americans are out of work.
By paying workers more to remain unemployed than they would receive by returning to work, the federal government is forcing the hands of employers. If states lower lockdown restrictions before July 31 and allow many workers to go back to work, employers will face a difficult choice: do they remain closed until August, or do they raise wages to compete with unemployment? As Huffman noted, if restaurants want to scale up to meet takeout and delivery demand during the crisis, they already face this difficult decision.