How to slow the recovery.
The Biden plan should provide enough relief to carry the economy through the worst of the pandemic. One concrete example is the supplemental unemployment benefit, which Mr. Biden proposes to increase from $300 a week to $400. More important, the extra benefits will last at least through September, then phase out automatically as the labor market improves. Both changes are wise. (emphasis added)
This is from Alan S. Blinder, “Biden’s Stimulus Hits All the Right Notes,” Wall Street Journal, January 20, 2021 (print edition.) The article is gated.
With federal benefits of $400 per week, this translates into $10 an hour for a 40-hour week. That’s on top of state unemployment insurance benefits, which are typically somewhere between $250 and $500 per week. Take even the low end of $250 and that translates into $6.25 per hour for a 40-hour week. So that’s $16.25 an hour. Although unemployment benefits are subject to income taxation, they are not subject to payroll taxes. The employee’s share of payroll taxes is 7.65 percent. So to break even by taking a job, a worker getting $16.25 per hour for not working would have to get at least $16.25/(1 – 0.0765) = $17.60 for working. And if the worker wants to net at least, say, $3 an hour before tax (but after payroll tax) for working, he would have to be paid at least $20.84 for working.
But that very fact means that a few million people, especially those making below $20 an hour, will take their time getting a job. That means that the labor market improvement that Blinder depends on, though it will happen, will be slower than otherwise precisely because of the extra $400 per week. Thus the title of this post.
Blinder claims that this policy is wise; it is anything but.