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A lot of people are focused on the supposed generosity of the current UI replacement rate. I know that, for some, it just sort of “feels” wrong to have UI benefits exceed 100% of the previous wage. But the emphasis on that 100% level is misguided. Let’s explore why. 1/x
First, what’s the actual concern? Is it that you’re worried a replacement rate over 100% means that many workers will prefer to remain unemployed rather than take a job?
Well, we know that’s not happening. 2/x
Well, we know that’s not happening. 2/x
Here’s an analysis from economist @ernietedeschi. He looks at people who moved into and out of employment over the last few months and finds NO effect from UI higher wage replacement rates. 3/x https://twitter.com/ernietedeschi/status/1283829018735910917
My impression is that many people are surprised by this. After all, if UI benefits really are higher than wages, why isn’t it discouraging people from working?
And the answer is: lots of reasons. 4/x
And the answer is: lots of reasons. 4/x
First, under our current unemployment insurance system, recipients aren’t allowed to turn down a job with roughly the same wage they made before they were laid off. They can lose their UI benefit if they do. 5/x
But even if you think that rule isn’t widely enforced, there are still other reasons why a 100%+ replacement rate doesn’t have the effect you might think. For example, compensation from work is not just about wages. 6/x
In many jobs, non-wage benefits (like health insurance, retirement benefits, paid time off, etc.) can be as much as 35 or even 40% of the wage. Replacing the wage at 100% or more doesn’t replace those benefits. 7/x
So, for many unemployed workers, even if they are getting more in cash, they are still taking a hit because they lost their non-wage compensation too.
That’s a big reason why there’s no magic to the 100% level. It’s not actually 100%. 8/x
That’s a big reason why there’s no magic to the 100% level. It’s not actually 100%. 8/x
Thirdly, people aren’t stupid. They know that a temporary unemployment benefit isn’t the same as a permanent job. Most people aren’t going to pass up the relative stability of a job for the uncertainty of a UI benefit, even if it’s higher than normal for now. 9/x
This is especially true in recessions, when jobs are scarce. And it might be even more especially true in this recession, when there’s extra uncertainty about the future of the economy and the job market. 10/x
The bottom line is that the single-minded focus on “replacement rates” is off base. It may sound reasonable, but it’s a red herring. Policymakers should worry less about replacement rates right now and more about keeping families and the economy afloat. 11/11
