How stimulus payments are incentivizing unemployment

Dan Hadley in Executive America

The common phrase in many sectors right now is “I just can’t find good staff.” Businesses at all levels have adjusted their recruitment and hiring practices, some to the point where they are begging people to come and work for them. Sign on bonuses, entry tickets into prize lotteries and extremely flexible working conditions are just some of the extras on offer for those workers in countries like Australia, the United Kingdom, and the USA.

It doesn’t stop there though. Some businesses have even resorted to offering to pay University tuition fees (separate to the Company’s operation) if you work enough shifts. MacDonalds Corporate in the US announced in late 2018 that employees are eligible for $2,500 in Tuition Assistance each year if they are employed by McDonald’s for at least 90 cumulative days and average 15 hours per week or more in work time.

Further still, some Companies are providing meals, increased health benefits and even cars to baseline employees – options that never would have been available just 2 years ago. With millions of jobs available, there is a fight at ground level for people. High demand for labour is straddling a major shortage in supply. Governments have spent so much money across the major economies of the world to ensure job retention and assist those in covering their personal cost of living and maintaining economic activity. Could these pay incentives have contributed to the very problem we face today though?

Social Security vs. Job Keeper and Business Assistance

Renowned and controversial Economist Professor Thomas Pikkety from the London School of Economics coined the effective phrase; “there is no perfect economic system and there probably never will be.” Pikkety was right. Economic perfection is a relative term anyway and a fool’s game as each individual’s idea of such a concept differs.

What a lot of Governments have developed though, are various effective means of income distribution. Usually through the social welfare systems such as US Social Security Administration, the Department for Work and Pensions in the UK and the Department for Human Services in Australia. These avenues allow for daily and weekly payments to those who are unemployed or have returned to work and need various benefits. In a crisis though, these avenues can be used to send payments to a wider scope of recipients as was seen in 2008 and 2009, post-Global Financial Crisis (GFC).

Social security as a means of economic stimulus involves increased payments to those individuals already on the welfare system and possibly payments to those still working in the event of a crisis. The theory proffers that as more money is placed in the hands of people, they will spend it and this will create economic activity, jump starting the dampened economy. This model can be interrupted by factors such as the personal propensity for people to save money or spend on oversees goods and services. The effect is reduced when money stops flowing and moving. None the less, the emphasis here is on the individual with a focus on spending money. This drives deficits higher and increases the flow of money in the economy.

Job Keeper and Job Relief

Many nations have resorted to some form of “job-keeping” economic stimulus relief aimed at retaining jobs in businesses. Varying industries have been affected in varying ways. Referred to as “Job Keeper” payments in the UK and Australia from their respective Home Office the USA Department of Treasury have provided payments to businesses as part of their COVID-19 Economic Relief program.

These payments are essentially designed to flow from the Government to businesses effected in order to ensure wages can still be paid. Where idle employees may otherwise be made redundant to save a sinking ship, the business can continue to pay them their wages (or some portion of them). Those workers drive the goods and services in the economy by way of production but also spend their money contributing to economic activity.

Increased social welfare benefits and bonuses for all…

With the same aim of stimulating aggregate demand, many nation’s Governments have increased social welfare payments as well as one off “bonus” transfers to all citizens as part of the economic relief package. The hope has been, as was seen in the post GFC years, that such bonus payments get spent on goods and services which would in turn kick start the economy.

Although this is true, such payments have been shown to incentivize unemployment. On an individual level, many people can become accustomed to increased “free” money. If one is being paid to sit down on the couch at a higher rate than previous unemployment benefits would otherwise provide, and bonuses are added to the mix, the incentive to work is reduced.

The Global Financial Crisis, now a road hump in comparison to COVID-19, saw monetary stimulation in many countries. The premise? If we pay people money, they will spend it and the economy will maintain its vigor. Spending equals aggregate demand, aggregate demand equals jobs, which equals prosperity.

Unfortunately, there is a limit though. Monetary stimulus is a tradeoff. We trade real economic activity for money when we hand out cash. Theoretically, we could give everyone one million dollars cash tomorrow. We could print it or deposit into everyone’s accounts through social security mediums and make everyone a millionaire. But what would happen?

Why would most people work if they had that much money? The supply of labor would dry up, a shortage in goods and services would ensue and the real value of money (our personal purchasing power) would drastically reduce. Prices would soar and we could easily do more damage than good.

The potential rise in unemployment has been reduced in many economies

The good news is that many forces play a part in the equation of labour supply, labour cost and employment rates. Other economic strategies have been employed in many nations including fiscal stimulus by way of tax reductions and other measures. Many nations have ramped up their job search programs to help those who do seek employment. In many economies, the reduction in employment and average hours worked per citizen has not necessarily led to a major increase in unemployment, according to varying national workforce survey statistics.

In many countries, the rise in unemployment figures has been softened partially due to significant downward trends in workforce participation rates. Many people have also temporarily suspended job seeking activities during COVID-19 due to the effects of lockdowns. Standard labour force definitions tend to classify such citizens as inactive in most modern economies and therefore not part of a national workforce. Unsurprisingly, many people saw little point in looking for work during intense lockdown periods or were reticent to pursue employment due to additional household needs and efforts such as the care of children and home-schooling duties.

Have we lost the spirit to go above and beyond after two years of being paid to sit on the couch and work from home?

The inextricable link between one’s personal work pursuits and the vitality of the economy as a whole is more important now than ever before. This Economist suggests that it’s time to shake off the lethargy of the last 2 years, take your business forward and challenge the status quo. The economy is a living and a breathing machine made up of the hearts of minds of its country’s citizens.

Perhaps Margaret Thatcher said it best in 1990 when she said: “Disciplining yourself to do what you know is right and important, although difficult, is the high road to pride, self-esteem, and personal satisfaction.” Indeed, the time is right to take pride in our countries and economies as we work through an economic rebuild globally.

Increased income support and job keeper programs have been vital to staving off an otherwise meteoric economic crash in many countries. These efforts have provided a lifeline in modern economies by stimulating aggregate demand to keep the cogs turning. It will be important though to stimulate hard work, participation and workforce pride as signs emerge that life may finally return to normal.

Dan Hadley (MBA, BCOMM, CMC, IML) is an Economist and Management Consultant based in Australia. His services include strategic & economic advisory services, risk management advisory and corporate consultation in Quality, Safety and Environmental organisational management systems.

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