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Bonus Army

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Bonus Army

Pay workers for finding a job, not for staying unemployed. October 8, 2020
Covid-19
Economy, finance, and budgets

After a national economic shutdown and the self-imposed mass unemployment, some American businesses are now struggling to hire workers again. Job openings rose sharply, to 6.6 million, in July, returning to pre-pandemic levels. At the same time, a massive reallocation of resources has taken place across economic sectors—one that is far from complete. Rather than delaying the process of adjustment, public policy can help smooth the transition.

The pandemic economy in the spring and early summer was characterized by lockdown and reopening. Policy was aimed at providing liquidity to individuals and businesses to keep them afloat during the economic disruption. The federal CARES Act provided an additional $600 per week in unemployment benefits, which meant that most unemployed workers earned more from the benefits than they did when working. This policy helped support the incomes and consumption of unemployed workers, and during the lockdowns the disincentive effects were likely small. Recent research fails to find any negative impact on employment from these enhanced benefits.

Now, however, most of the businesses that will reopen have done so already, while an increasing share of temporary business closures have turned permanent—yet the policy debate remains stuck on the same goal of providing liquidity, especially when it comes to unemployment insurance. Additional support may be needed, since unemployment remains high, though it has declined substantially. But the main goal now should be to get workers back on the job, rather than subsidizing prolonged spells of unemployment.

Instead of encouraging unemployed workers to hope for a return to a job that may no longer exist, policymakers should help in the reallocation process. While the leisure and hospitality sector—especially restaurants and hotels—continues to struggle, many retail businesses—from groceries to home goods—are thriving. One way to foster this reallocation of resources is to provide a reemployment bonus, paying workers when they find a new job.

Several private businesses have offered signing bonuses to attract workers. In Wisconsin, as part of its plan to hire 100,000 workers nationwide, Amazon is paying a $1,000 bonus for new hires at its distribution center in the Kenosha area. This has increased local competition, encouraging Uline, a distributor of shipping and packaging materials, to announce a $6,000 signing bonus. Federal and state governments should follow the lead of these employers in offering bonuses for workers starting new jobs.

Introducing reemployment bonuses as part of unemployment insurance is not a new idea. In the 1980s Illinois, New Jersey, Pennsylvania, and Washington experimented with trial programs that included such bonuses. In each case, the unemployment insurance benefit for a test group was supplemented with a bonus if a worker obtained a new job within a specified time and kept the job for a specified duration. These programs shortened the length of unemployment spells.

Illinois’ reemployment bonus program was the most successful. In 1984, the state implemented a randomized controlled trial that paid unemployment insurance claimants a one-time bonus of $500, which equaled about four weeks of average benefits, if they found a job within 11 weeks and kept the job for four months. One study found that, compared with the control group, claimants found a job on average about one week earlier, resulting in about $150 less in payments per participant. Since only a fraction of participants claimed the reemployment bonus, the program provided a net savings to the unemployment system.

From a social viewpoint, unemployment-insurance benefits are transfers from payers to recipients and thus have no net cost—but the bonus program provided net social benefits by increasing the earnings of participants. Evidence from other states was mixed, but those with bonus payments of four to six times weekly benefits generally recorded unemployment durations of about one week shorter.

This earlier experience suggests that a reemployment-bonus program could help the unemployed get back to work. A hypothetical program could award $1,500 (about four times average benefits) to unemployed workers who find a job within 12 weeks and keep it for at least four months. States could tailor the payments to their own unemployment systems, or even vary them by worker. These bonuses could help shorten unemployment durations, generate social gains by putting workers back to work, and possibly even reduce the cost of unemployment programs. As the U.S. continues to reopen, it’s imperative that we get people working again—and not just for the health of the economy but also for public morale.

Photo by Spencer Platt/Getty Images

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