To aid recovery, policymakers need to fix their unintended consequences

Four months ago, the United States was a very different place. There was snow on the ground, the NBA was still playing, and the unemployment rate was 3.5 percent. Then the COVID-19 outbreak changed everything.

In public policy, solutions are the coin of the realm. The trouble is that with every intended “heads,” there is an unintended “tails.” Pandemic response, it turns out, is no different.

As states shuttered their economies to reduce the coronavirus spread, businesses were left with declining revenue and limited funds to pay employees. Layoff numbers began to spike. Rushed to act, Congress responded by floating operating capital to businesses, but also accidentally incentivized a number of layoffs with the way those loans were structured. Additionally, a $600 federal pandemic unemployment benefit was grafted onto state unemployment systems. The logic made sense at the time: People were out of work through no fault of their own and needed periodic influxes of cash to pay their bills. Rather than set up an entirely new system, state unemployment agencies would handle the logistics.

The reality looked far different, with millions of Americans collecting more in unemployment benefits than they had previously earned while employed. One paper estimates that the expansion in unemployment benefits under the CARES Act has resulted in 68 percent of workers having replacement rates above 100 percent—in other words, they’ve more than replaced their prior salaries.

Now that every state in America is in the process of reopening and employers are trying to jump start their businesses, this disincentive must be managed. And the mismatch between employers and employees must be addressed—despite 77 percent of laid-off workers believing they would be re-hired by their employers, only 45 percent of business owners indicated they would be able to re-hire them. While some may assume their job will always be waiting for them, small businesses cannot always afford to wait. The best way to make sure your job is still there for you is to simply return to it.

States, Congress, and the Trump administration should prioritize two core issues: fixing disincentives to return to work and incentivizing rehiring.

First, continue to make clear to individuals and businesses their rights and obligations. Refusal of suitable work can disqualify an individual from collecting unemployment benefits in most cases. This universal element of state unemployment laws relates to a federal requirement that an individual must be able to work, available to work, and actively seeking work in order to be eligible. States should enforce this provision to maintain system integrity and ensure that benefits are spent on those who truly qualify and need assistance, and to encourage workers to return to their jobs.

West Virginia Gov. Jim Justice and Arizona Gov. Doug Ducey have both reminded their respective state’s residents that refusal of suitable work jeopardized their eligibility. All state leaders should enforce this provision to ensure businesses have employees and can boost their economies.

Second, since employment is a two-way street and a willing worker still needs a job offer, employers need a nudge to re-hire their workers. At the state level, harmless provisions have been implemented successfully in a few states, including Connecticut and South Carolina. Incentivizing re-hiring by providing a break on unemployment taxes is a good solution to help employers bring back employees they likely would not have laid off at all if not for the pandemic.

Lastly, federal pandemic unemployment assistance must be allowed to expire on schedule. If further economic stimulus is necessary—which is a separate discussion—it should be designed outside the framework of state unemployment systems. The strain on state agencies and the inherent disincentive to work have been too great.

Since March, millions of Americans have seen their lives derailed from measures focused on protecting public health that, unfortunately, also harmed state economies. As America begins to recover, it is incumbent on policymakers to repair the unintended consequences of their previous actions.

Joe Horvath is a senior fellow at the Foundation for Government Accountability.