by Brian Balfour
Senior Vice President of Research, John Locke Foundation
On the heels of the poor job growth figures from last week, discussion has been heating up over whether or not unemployment benefits are making the unemployed reluctant to return to work. It is certainly a worthy discussion to have, but unfortunately some of the debate is incomplete.
Take, for instance, this WRAL article on the topic. This section attempts to provide some context to the trade-offs confronting the unemployed:
The current federal pandemic jobless benefit check is $300 a week. A full-time worker making North Carolina’s minimum wage of $7.25 an hour earns just $290 a week. So, the very lowest-paid workers may be better off staying home, at least until the federal checks stop in September, said Mike Walden, an economic at North Carolina State University.
On the surface, it seems simple enough. If a job offers less than the $300/wk benefit, people will likely opt to stay at home. If the job offers more than the $300 per week, they will return to work to take the larger income.
But that’s not how people make decisions. People make decisions on the margins. That is, they evaluate the marginal benefit versus the marginal cost. In this case, it’s not as simple as concluding that a job paying, say, $400 a week is the obvious choice over a $300 a week unemployment check. Rather, it is a comparison between the incremental benefit of the job compared to the incremental cost of taking the job.
In this example, the incremental benefit of taking the $400 a week job would be the $100 a week additional revenue you’d receive compared to the $300 a week you can receive for remaining unemployed. Compare that to the incremental cost of giving up 40 hours a week of leisure time (not to mention time preparing for and commuting to the job) compared to the zero hours working it costs you to continue receiving unemployment.
The net marginal financial benefit would be $100 a week, or only $2.50 per hour for your effort. From this perspective, the choice appears far less obvious. How many people would be willing to sacrifice that amount of time to receive a marginal benefit of $2.50 an hour for their time?
It’s important to keep this in mind because the $300 per week unemployment benefit, when evaluated through the lens of marginal analysis, will have an impact on the employment decisions of more people than many might think.