Policy Brief: Unemployment (Over)Compensation

BADGER INSTITUTE NOTE from Patrick McIlheran Policy Director 

As the COVID-19 pandemic struck the  United States in 2020, Congress began  shotgunning money out over the country in unprecedented ways.

One was an extraordinary hike in unemployment benefits — an extra $600 a week. Many Wisconsinites were already receiving as much as $370 per week, bringing their total payment to almost $1,000, more than many normally earned. 

Employers short of workers swiftly pointed out that, for many employees, this meant returning to work could lead to an actual cut in pay. As companies struggled to open up again, commentators wondered how much of a severe labor shortage was caused by this disincentive to work — an “implicit tax,” as economists call it.

Thanks to a team of respected economists led by Ike Brannon, president of Capital Policy Analytics and a longtime Badger Institute visiting fellow, we now have the answer.

Brannon and his team found that extended supplemental benefits really did deter people from returning to work — and were able to put a number on the harm done to Wisconsin. We now know the real impact of the governor’s decision to extend supplemental benefits even when so many other states had decided enough was enough.

Finally, Brannon, Loren Wagner and Sam Wolf examine some possible paths for reform. Crises happen, and it is crucial to understand what was done badly in order to better respond to the next one. The findings and recommendations here don’t just shed light on effective crisis management, however. Our unemployment compensation system has long created disincentives to work that can and should be alleviated. This paper helps show a path forward.

The Badger Institute hopes the findings in this report will help policymakers forge a more thoughtful approach to assisting those who are temporarily sidelined while also encouraging employment and economic growth.

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