More than relief: How unemployment insurance can limit community transmission in a pandemic – and what to do next

Unemployment insurance (UI) federal supplements — the enhanced unemployment benefits that were authorized in response to the COVID-19 pandemic — have been extended until the first week of September as part of the American Rescue Plan Act (ARPA). While unemployment benefits are of great importance in terms of providing relief to individuals — allowing people to afford to pay their rent and buy food — this expansion is important for another reason: it is becoming increasingly evident that we cannot reduce community transmission rates without providing the financial ability for individuals to also act in the interest of the greater public good. As with a vaccine, the benefit of staying at home is far greater than the benefit to just the individual. The public, at large, benefits exponentially from each individual who can afford to turn down a job that would otherwise have increased community transmission rates.¹

In particular, at the start of the pandemic, economic analysis revealed that while workers themselves may benefit from being able to stay at home, the vast majority of the benefit of a worker staying at home actually accrues to society at large — more than 99.9 percent — while less than 0.1 percent of the social benefit of a worker giving up employment goes to the individual worker. Back-of-the-envelope calculations based on recent research suggest that the benefit to the public of an individual staying at home, in monetary terms, was roughly $1500 per week.² It is hard to imagine any other activity that would generate such large economic value for the public per worker in such a short period of time.

However, that enormous benefit to society is not necessarily internalized by the individual worker making the decision. In fact, new economic research shows that individuals perceive the cost to the public of becoming infected to be less than one-third of the true cost to society. This undervaluation of the benefits of staying at home — and perhaps turning down a risky job in order to do so — has stark implications for how society ultimately overcomes the disease while valuing the economic benefits of employment. Without expanded unemployment benefits, individuals are unable to sufficiently take on what is ultimately a very expensive action: turning down a risky job — and the wages and compensation that go with it — in order to produce what is, in large part, a public good.³

Job openings and COVID prevalence

New evidence on job vacancies and job postings shows that the high rates of unemployment are not just a result of lack of hiring on the employer’s side.  The majority of job seekers — for good reason — are seeking jobs that can be done at home, while less than one in 10 job postings are for work that can be done at home.⁴ So we currently have both a labor demand shock and a labor supply shock causing high unemployment — something that is quite rare in a recession and perhaps unique to a pandemic situation.

A natural question might be whether we need additional incentives for workers in order to convince the unemployed to accept job offers in posted positions. However, there is no known correlation between safety in an industry and the industries that are posting the greatest number of job openings. According to data released by the Department of Labor this month, posted vacancies, while at a six-month high, tend to be in specific industries like construction, warehousing, and delivery services.⁵ The latest data from job posting sites, such as Indeed, confirm this.

At the same time, the industries that have the greatest number of new job openings are not necessarily the industries and occupations with the lowest rates of transmission. In fact, analysis of recent data from the Washington State Department of Health decomposed lab-confirmed COVID-19 cases by occupation and industry shows that the percentage of employees in the construction sector with confirmed COVID-19 cases is significantly greater than that of the food services and accommodation sector: for every 1,000 workers in the construction industry, there are 24 lab-confirmed COVID-19 cases, relative to 15.9 in the accommodation and food services industry (and 15.8 in the median industry).⁶ Transportation and warehousing has similarly high rates, at 21.4 cases per 1,000 workers, still significantly higher than in either the accommodation and food services sector or in the median industry.⁷

While the data are not limited to cases resulting from workplace exposure to the virus and occupationally-acquired cases cannot be distinguished from community-acquired cases, the data clearly demonstrate that COVID-19 has a disproportionate impact on certain workplaces. Workers in both the construction and the transportation and warehousing industries have a greater than proportionate share of lab-confirmed COVID-19 cases relative to the percent of the employed population working in these industries, as shown in the table below. Furthermore, whether a disproportionate number of cases resulted from workplace exposure to the virus or, for example, from common modes of transportation required in order to commute to work, the data suggest, first, that there are still higher than average risk levels associated with working in the industries and occupations that currently have a high number of vacancies. Second, regardless of how the case was acquired, the data can be viewed as measuring a characteristic of the work environment itself: if a greater than proportionate share of a construction worker’s coworkers is likely to be infected with COVID-19, it still indicates that the risk to an individual construction worker from going to work as well as the activities associated with working, such as group transportation to work and breaks at work, are still greater for both that individual as well as to his or her surrounding community.

*Percent of WA cases with complete employment and industry data available. See full table in appendix.

Therefore, if workers are reluctant to consider job vacancies due to concerns about their personal health or safety, this concern is justified. Moreover, because individuals tend to underestimate the benefit to society of staying at home and reducing community transmission rates, we should, in fact, be offering an additional incentive for workers to turn down work that would otherwise increase transmission rates.

Recent research supports this. A recent paper published in Science uses cell phone data from more than 10 million individuals in the U.S., and the authors find that by mid-August 2020 the primary group through which resurgence took place in the United States was through working adults who needed to support themselves and their families.⁸  Such large effects of an individual’s decision to work on others — modern economists call them “externalities” —  means that we should specifically be offering an additional disincentive to work that reflects the full social cost of work during a pandemic. This disincentive is, in fact, a feature of the current set of expanded unemployment benefits and not a bug.

Rather than shutting down productive activity altogether, the additional incentive to turn down work allows workers to align their individual decisions with the decision that is in the best interest of the public, much like a carbon tax allows companies and consumers to incorporate the social cost of pollution into their individual decisions. While this would likely drive up both wages and prices, this also allows consumers to consider whether the good or service they purchase is worth the full social cost of what it takes to produce such a good or service in the midst of a pandemic.

Looking to the future, however, a policy that considers the full range of effects of expansive unemployment benefits should couple expanded unemployment benefits with increased subsidies for essential goods and services whose prices may increase as a result, such as increased federal funding for food safety net programs, and specifically, expansions to the Supplemental Nutrition Assistance Program (SNAP). Expansions to SNAP should not only include increases in overall SNAP spending but also in the maximum SNAP benefit level, which would ensure that the most disadvantaged of SNAP recipients also receive increased benefits as food prices rise.⁹¹⁰¹¹

Furthermore, it is a critical aspect of the ARPA that workers have a degree of choice in turning down a job under some circumstances while remaining eligible for unemployment insurance. A common criticism of the ARPA is that Section 2102 allows workers to submit a “self-certification” that they are unable to work due to the coronavirus outbreak, which allows them to turn down their current job and potentially receive a higher weekly payment by remaining home. However, the extent to which workers have a degree of choice to turn down a job in favor of unemployment benefits is a feature of the policy that will likely result in a more efficient economic outcome — the preservation of those jobs whose value is truly great enough to outweigh the cost to society, and upward economic pressure on wages to ensure that those jobs are compensated based on their value.¹²¹³

Expanded unemployment benefits coupled with a degree of choice should be viewed as a policy tool that offers the individual a higher threshold or “reservation wage” before accepting work, a threshold that can be optimally set to reflect the cost to the public of the increased transmission rates resulting from working. The advantage of coupling expanded unemployment benefits with a degree of choice for workers is precisely that it must be the case that the work is truly important or needed and that that value must be reflected in the wages offered in order for the worker to be willing to accept a job under risky circumstances — a risk that is not only borne by the individual but by the rest of the community.

Enhanced unemployment insurance offers more than a benefit to the individual of being able to weather the period of time when work is hard to find. Like a vaccine, the benefit of staying at home is far greater than just the benefit to the individual.¹⁴ The unmet labor demand is present for good reason — some workers are turning down jobs for their own health and safety, but currently, only those who can afford it are doing so. When a significant share of the population is unvaccinated, the public benefits enormously from each individual who can afford to turn down a job that would have otherwise increased community transmission rates.  Importantly, this benefit to the public grows larger at an exponential rate in communities and in regions where transmission rates are higher.

What to Do Now?

Although the country’s national daily average in coronavirus infections plateaued temporarily in March, a majority of states — 33 states — have registered increases in infections in the past two weeks, nearly a third of states have seen their average number of cases rise at least 10 percent, and in the past week, 38 states have reported an increase in the number of people hospitalized with COVID-19. Some states have been hammered by a surge of infections and hospitalizations even as others have seen the crisis begin to ease. However, even within states, there is an enormous amount of variation in the levels of community transmission at the county level, according to CDC data.

One measure that Congress and the Biden administration can take as a rapid-response tool to help reduce transmission rates in these regional hotspots for resurgence across the United States is to increase federal supplements to unemployment benefits in areas where the effective reproduction numbers are far above one, specifically, where effective reproduction numbers are above one with 90 percent probability (high transmission rates).¹⁵ While this may result in a disincentive to work in those communities, this would, in fact, be a large part of the goal.

Tying unemployment benefits to a local measure is not without precedent. Extensions of emergency unemployment compensation have been tied in the past to state unemployment rates, for example.¹⁶ In the current environment, the precipitating conditions would be high transmission rates rather than high unemployment rates.

Moreover, several states facing resurgence of the virus and its variants have requested federal intervention in increasing vaccine distribution to these regions, but even if the federal government were to increase distribution of the vaccine to these areas, the impact on health, hospitalizations, and mortality would not take place for another six weeks. However, a targeted expansion of the weekly federal supplement to unemployment benefits back up to the $600 per week mark from the CARES Act, targeted specifically to regions, even counties, that face resurging transmission rates would be a faster and more effective way to respond and would allow working adults to afford the ability to stay at home and to curb transmission.

What to Do Next?

Approximately 20 million workers are currently receiving unemployment insurance benefits. However, as the vaccination rates rise across states and we begin to think about a pathway out of the pandemic and a safe return to work, one way that Congress and the Biden administration can prepare for a safe reopening of the economy is to tie unemployment benefit supplements to local vaccination rates in one’s county of residence. In particular, the federal supplement to UI should decline gradually as the vaccination rate in one’s county of residence rises.

The idea is that we want to support people who have lost their jobs until the economy is ready to reopen, but beyond replacing lost income, we furthermore want to offer an additional incentive for individuals to take into account the effect of taking on a risky job on transmission rates in one’s surrounding community. A gradual decline means that those who can return to work at least cost will be the first to do so. A gradual decline has the additional advantage that employers can scale up production as some employees return to work and as demand gradually increases.

The degree to which one’s community is placed at risk from an individual’s decision to work decreases with the vaccination rate. As the vaccination rate rises, individuals will better be able to make work decisions for themselves that increasingly do not spill over into their surrounding community.

Appendix

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*Percent of WA cases with complete employment and industry data available.
Source: “COVID-19 confirmed cases by industry sector,” Report, Washington State Department of Health and Washington State Department of Labor and Industries, December 17, 2020¹⁷.
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References

Bitler, Marianne, Hilary Hoynes, and Diane Schanzenbach (2020), “The Social Safety Net in the Wake of Covid-19,” NBER Working Paper 27796, 1-48.

Burdett, Kenneth and Dale Mortensen (1998), “Wage Differentials, Employer Size, and Unemployment,” International Economic Review, 39(2): 257-273.

Delamater, Paul, Erica Street, Timothy Leslie, Y. Tony Yang, and Kathryn Jacobsen (2019), “Complexity of the Basic Reproduction Number (R₀),” Emerging infectious diseases, 25(1): 1–4.

Dube, Arindrajith, Alan Manning and Suresh Naidu (2020), “Monopsony and Employer Mis-optimization Account for Round Number Bunching in the Wage Distribution,” NBER Working Paper No. 24991.

Flinn, Christopher (2006), “Minimum Wage Effects on Labor Market Outcomes under Search, Matching, and Endogenous Contact Rates,” Econometrica, 74(4): 1013-1062.

Lemos, Sara (2004), “The Effect of the Minimum Wage on Prices,” IZA Discussion Paper No. 1072.

Manning, A. (2003), Monopsony in Motion: Imperfect Competition in Labor Markets, Princeton; Oxford: Princeton University Press.

Monod, Melodie, Alexandra Blenkinsop, Xiaoyue Xi, Daniel Hebert, Sivan Bershan, Simon Tietze, Marc Baguelin, Valerie C. Bradley, Yu Chen, Helen Coupland, Sarah Filippi, Jonathan Ish-Horowicz, Martin McManus, Thomas Mellan, Axel Gandy, Michael Hutchinson, H. Juliette T. Unwin, Sabine L. van Elsland, Michaela A. C. Vollmer, Sebastian Weber, Harrison Zhu, Anne Bezancon, Neil M. Ferguson, Swapnil Mishra, Seth Flaxman, and Samir Bhatt (2021), “Age groups that sustain resurging COVID-19 epidemics in the United States,” Science, 371(6536): 1-12.

“Covid-19 Confirmed Cases by Industry Sector,” Report, Washington State Department of Health and Washington State Department of Labor and Industries, December 17, 2020, Link.

“Metrics for Case Investigation and Contact Tracing Conducted by Washington State Centralized Investigations,” Report, Washington State Department of Health and Washington State Department of Labor and Industries, March 10, 2021, Link.

“Methods for COVID-19 Surveillance in Washington Workers’ Compensation Data,” SHARP Report #64-15-2020, Washington State Department of Labor and Industries, August 18, 2020.