Labor Day is traditionally an opportunity to recognize the contributions made by workers, but this year it's small businesses that are celebrating. That's because this Labor Day coincides with the end of enhanced federal unemployment benefits that were paying people not to work. These payouts have contributed to a record labor shortage that prevents small businesses from bringing the economy back. Oxford Economics estimates that roughly 11.2 million Americans will lose some form of federal unemployment benefits this week. This will help fill the 10.1 million available jobs nationwide.
On Friday, the Labor Department released its August jobs report, showing that only 235,000 jobs were created in the month -- a huge miss from economists' expectations of around 750,000. There are still 5.3 million fewer people working than before the pandemic. On Thursday, the Labor Department announced its weekly jobless claims numbers, which suggest that overly generous unemployment benefits are to blame for this labor market slack. They show that about 60 percent more Americans filed continued unemployment claims in late August than in early 2020.
Enhanced federal unemployment insurance paid recipients $300 per week in addition to weekly state unemployment payments, which average nearly $400. That means that Americans could make nearly $3,000 a month tax-free in unemployment benefits, not including the value of other welfare programs such as monthly child credits and food stamps, for sitting on the couch. No wonder the labor market hasn't bounced back.
According to a Committee to Unleash Prosperity report, the average unemployment benefit for a household with two unemployed parents was more than $72,000 -- higher than the nation's median income. Research from JPMorgan Chase estimates that 48 percent of benefit recipients made as much or more than their previous wages.
Twenty-five Republican states recognized the perverse incentive posed by these benefits and ended them in the spring and early summer. Nine out of the ten lowest unemployment states in the country are among this group that terminated enhanced payments early. In contrast, all ten highest unemployment states, including Washington D.C., continued to accept them until recently.
Goldman Sachs economists found "clear evidence that benefit expiration increased the rate at which unemployed workers became employed." They predict that the end of the payouts will create 1.5 million jobs nationwide by the end of the year. Research from the Foundation for Government Accountability finds that job creation in Arkansas nearly doubled in the two weeks after payments ended.
The most compelling evidence of the negative impact of enhanced insurance comes from small businesses themselves. Jim Balis, the CEO of Sizzling Platter, which operates about 500 restaurants nationwide, told the Wall Street Journal that applications rose by roughly 20 percent in non-benefit states. "We saw a material difference in the states that pulled benefits back."
Meanwhile, Kevin Thomas, general manager of McSeagull's in Boothbay, Maine, was forced to close his restaurant and let his 36-person workforce go this summer due to the labor shortage. "It really comes down to how much money will you make going to work versus how much you will make sitting at home doing nothing?" he said. "If that money is too close to each other people will want to sit home."
Over the past few months, we've heard hundreds of similar anecdotes from small businesses about how they can't compete with government benefits to rehire their workforce. Academics who say there is no relationship between the benefits and labor shortage should get out of their ivory towers and see what is going on in the real world.
This weekend's elimination of enhanced federal unemployment insurance is a significant win for American small businesses and the overall economy. Yet the victory may be short-lived. Democrats are attempting to push through a $3.5 trillion entitlement package that includes numerous new disincentives to work, including free college and de facto basic income, that would exacerbate the labor shortage.
For small businesses, the battle against bad government policies never ends. But at least this Labor Day long weekend, they can take a moment to cheer.
Alfredo Ortiz is president and CEO of the Job Creators Network. Stephen Moore is the president of the Committee to Unleash Prosperity and a member of the Job Creators Network.