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Are Unemployment Benefits too Sweet?

Updated: May 11, 2020

To assist the states, congress passed the CARES Act. The act expanded unemployment benefits to cover more people and it increased the weekly benefit by $600 for every worker regardless of their salary. This additional $600/week is the equivalent of working 40 hours a week at $15 per hour. People will get this amount added to their normal unemployment. Normal unemployment benefits in California average $345/week so the total with the $600 would be $945 per week or $23.62/hour. This is much more than the state’s minimum wage of $13/hr.

Many people are rightfully taking advantage of the generous payments by filing for unemployment. Governor Newsom has stated that California’s unemployment claims have skyrocketed past 4 million people since the Covid-19 pandemic started. Obviously, many people have been laid off as companies are struggling to cope with social distancing and the quarantine. However, this generous additional benefit is a headwind to improving the unemployment rate.

Per the chart above, anyone making less than $4,500/month or $54,000/year should take unemployment, as they will make more money not working than working. The shaded area actually represents the additional income they would make being on unemployment. Even if you make more than $54,000/year, you also need to consider the expense of getting to work and taking care of family. Is making more money working worth the trade-off?

This is creating a moral hazard as many employees understand that they will make more staying home than working. It’s going to be very interesting to see how many people go back to work after the 13 weeks of the additional benefit is gone. Many of the jobs will come back and many will not. Employers will have a choice of rehiring laid off employees or finding new ones. Let’s hope things turn around and congress doesn’t have to extend this benefit. If the benefits are extended with the current criteria in place the unemployment rate will continue to suffer.


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