With increased vaccination levels and many people returning to work, some governors have argued that federal pandemic unemployment programs are no longer necessary and are slowing down the economic recovery. Twenty-six states have recently announced that they are canceling or plan to cancel them over the summer. These programs have been a core part of the economic response to the pandemic by supporting families who have been unable to work. They increased weekly payments by $300 and opened unemployment insurance to people who are not typically eligible for unemployment insurance payments, such as gig workers. These governors are canceling the programs in their states, and 7 governors have replaced them with a “back to work” bonus which provides a cash payment to anyone who leaves unemployment and starts a new job.
The data we have on jobs over the last few months is volatile and open to many interpretations. Consequently, the extent to which unemployment insurance payments are holding back the recovery is highly contested. Research last year showed that the unemployment insurance enhancements did not seem to be a major factor in keeping people from returning to the labor market—the pandemic itself was the binding constraint. Some, like the Joint Economic Committee’s Alan Cole, have argued that this is no longer the case, while others, such as the University of Michigan’s Betsy Stevenson, have noted that many of the pandemic-related disruptions are still with us—people may not feel comfortable exposing themselves to COVID risks or are still unable to find childcare for unvaccinated children. So far, preliminary research does not see substantial differences in employment trends between the states that have ended the expanded benefits and those that have not.
The Red Tape of Return to Work Bonuses
Are return-to-work bonuses an appropriate substitute for unemployment insurance bonuses? There is a limit to how certain policymakers can be about this substitute when the effects of unemployment insurance bonuses themselves are unclear. Return-to-work bonuses seem like a great solution in theory (the Niskanen Center advocated for them last year). They continue to provide people with additional financial support while incentivizing them to rejoin the labor force. In practice, however, they can be difficult to implement and many people who should be eligible for the bonuses will not receive them.
Each state has a slightly different program design for a return-to-work bonus, but the basic structure is similar. Anyone receiving unemployment insurance as of a certain date who starts a new job, and stays in that job for several weeks (ranging from 4 weeks in Montana to 10 weeks in Arizona), is eligible for a payment ranging from $1,000 to $2,000 for full-time work.
Unfortunately, states have yet to publicly reveal exactly how people are expected to document that they have started a new job and stayed with it for the required amount of time. While some states may have accurate databases that allow them to use payroll or similar data to confirm tenure at a new job, it’s more likely that the burden of proof will fall on employees. New hires will have to contact the state’s office, provide documentation in the form of payroll stubs or a letter from their employer to prove that they have worked, and then wait for that information to be processed.
Each of these steps creates friction that could make life more difficult for these employees. New hires may feel uncomfortable pushing their boss to email them the required documents. Bosses could also use this government-provided incentive as a way of having more power over new employees, for example, by requiring them to work extra hours uncompensated to receive the necessary paperwork.
This friction will slow down the process of providing people with the bonus, or simply make it so that many people are unable to apply altogether. Some new employees simply will not hear about these new programs. Others may be dissuaded from applying. As we learned last year, many state departments of labor can take months to process unemployment claims. Processing these new claims of employment could take even longer. A person who takes a new job in July is unlikely to receive their bonus until October or later. This delay decreases the motivational impact of the incentive (unemployed people will need money in the short term) and is also likely to be mistimed from a macroeconomic perspective.
Moreover, many states have put limits on how many people will receive the bonus. For example, Kentucky will only provide bonuses to the first 15,000 people who qualify, and New Hampshire has set aside a 10 million dollar fund for the program. As a result, people who should qualify may apply, but not in time to actually receive the payment.
Cut The Paperwork
A better alternative would be for states to eliminate the requirement that people document that they have stayed in their new job altogether. States could either provide the bonus immediately upon someone exiting the unemployment insurance system or (for states that are continuing to participate in the federal programs) simply continue to pay people unemployment insurance for the last few months of the program even after they have found work. In other words, instead of adding a new process where states need to document and verify employment, they should simply stop verifying unemployment.
If we want people to return to work, the immediate incentive of the salary provided by a job is very attractive on its own. Additional payments contingent on a lengthy paperwork process that may not even go through are not going to get people back to work.