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The smart way for states to end pandemic unemployment insurance

Faced with concerns about getting people back to work, more US governors are landing on the obvious solution: Pay them.

And no, we’re not talking about higher wages, although that works. In this case, lawmakers in states like Maine, Arizona, Kentucky, and Connecticut are all launching programs that use expanded unemployment benefits into a one-time bonus given to unemployed people who obtain jobs.

The expanded unemployment benefits, passed during the pandemic to help workers shut out of their jobs by the coronavirus, have been blamed for slower than expected jobs growth during the recovery: Workers collecting benefits are unlikely to take jobs that pay a similar or lower wage. We still don’t have great evidence that this mechanism is stopping hiring—in most states benefits are less than the average wage, and low-wage workers still have seen the fastest uptick in hiring. Unemployment insurance may not be playing a bigger role than health fears, and it may actually be better for the economy if workers wait for a job that is the best match for their skills.

Still, this intuition around unemployment insurance blocking hiring has led governors in some 25 states to cancel the expanded benefits before their scheduled expiration in September. That may get some people back to work, but it also robs families of key support at a time when less than half the US population is vaccinated and the national unemployment rate is still 5.8%, far higher than it had been before the pandemic

There’s a smarter solution that has been adopted by some states in recent weeks: Use some of the unemployment funding as one-time bonuses for people who do get jobs. Adding the bonus increases the incentive for people to find work, while allowing jobless people who depend on the benefits to continue receiving them. In Maine, governor Janet Mills has set up a program to give employers a $1,500 payment for hiring workers and give the workers themselves a $1,000 payment. Connecticut will pay workers $1,000. Kentucky governor Steve Beshear says his state is developing a similar program.

If anything, these bonuses may be difficult to administer, requiring workers to prove they kept the job for eight to 10 weeks, and might not be generous enough compared to proposals that would convert more of the UI funding into the bonus by accounting for how much longer an unemployed worker is eligible for benefits.

A different version of this program in Arizona and Montana involves eliminating the expanded unemployment payments and replacing them entirely with the hiring bonus, akin to national legislation proposed by senator Ben Sasse. Sasse’s version would pay just over two months of benefits to workers getting jobs, which in his home state of Nebraska would pay nearly $5,000.

Policy wonks tend to argue that eliminating benefits entirely at the expense of the hiring bonus won’t be as effective as combining both programs, which target different populations—bonuses for people who could be working but haven’t, benefits for those who can’t find jobs and need them.

All this tinkering highlights the broader need for UI reform: For years, economists have been calling for the program to be pegged to economic data, so that it can automatically adjust its generosity in response to changing economic conditions. For example, Texas’ labor market, with 6.5% unemployment, may still need more support; New Hampshire’s, with 2.9%, may not require it. More broadly, the creaky system by which the program is administered, with aging computer systems and complex rules that make national tweaks difficult to enact, blocks deserving recipients from access, and incentivizes fraud. It needs a renovation of its own to allow governments to respond more efficiently to recessions.

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