In state where labor force participation is low, Reeves & Gunn are right on unemployment

*Appeared in the Laurel Leader Call newspaper  

Gov. Reeves recently announced he would be ending the state’s participation in extra federal unemployment benefits, saying that Mississippi no longer has a need to opt into programs like the Pandemic Unemployment Assistance which Congress passed last year to alleviate the impact of job losses due to COVID-19.  

In a letter, Speaker Philip Gunn had urged the Governor to end the program, stating that “small businesspeople…inform us their businesses are at risk.  They report that they cannot get employees to return to work because they can earn more from combined federal and state unemployment benefits than their normal wages.”

According to the Bureau of Labor Statistics (BLS), which measures wages, the mean hourly wage in Mississippi as of May 2020 was $20.00.  This means an individual working 40 hours per week will earn, on average, about $800.  Compare that to what an individual can currently earn by claiming unemployment – a maximum of $235.00 per week plus another $300.00 in the extra federal pandemic stipend for a total of $535.00 per week.  While this amount is roughly 33 percent less than what an individual can earn from working, it does represent a significant increase over “normal” unemployment benefits – an increase of more than 128 percent.

That means unemployment benefits, when including the federal supplement, have more than doubled for recipients.  Economics teaches us that this type of increase has an impact on human behavior.

It reminds me of what my old economics professor at Vanderbilt used to say…a lot. He’d always talk about “incentive alignment,” and while his examples were not usually unemployment-related, the same concept remains true here.  If individuals can earn nearly as much by filing unemployment as they can by working a job, then some (not all) will be incentivized to choose the former approach.

That’s particularly troubling in a state like Mississippi, where the labor force participation rate has lagged behind the nation for decades.  As of March 2021, the state’s labor force participation rate (meaning the number of people in the workforce, including those with jobs and those actively looking for jobs) was 56.1 percent, according to the BLS.  The U.S. rate stood at 61.5 percent for the same time period. 

When I was worked for former Gov. Haley Barbour, I led a project on the state’s labor force participation rate.  We commissioned a study from the W.E. Upjohn Institute for Employment Research to delve into why Mississippi’s workforce lagged behind our neighbors and the nation.  While the study is now about a decade old, many observations remain poignant today. 

“Labor force participation is a key social indicator because the economic performance of a state and the well-being of its residents are closely tied to labor force outcomes. Together, the labor force participation rate (LFPR) and the unemployment rate are of paramount concern to state governments because living standards and consumption are so closely tied to work and earnings from employment,” the paper began. 

It studied many reasons why individuals dropped out of the workforce and ultimately concluded that contributing factors were Mississippians living in non-metropolitan areas, Mississippi having a higher percentage of residents who had not completed high school and having a lower percentage of residents who had a college degree, and – you guessed it – the incidence of government income transfers, such as Social Security benefits and unemployment benefits. 

I am not an opponent of the state’s unemployment insurance program.  I believe it can and does serve an important societal purpose as a temporary stop-gap for those individuals who lost jobs through no fault of their own and are actively seeking other employment.  However, this program was never designed to be a permanent income solution and, with misaligned incentives, can do more harm than good to the state’s economy.

Like our state itself, Mississippi’s labor force market is complicated.  There are many reasons for low workforce participation, and it would be overly simplistic to say people aren’t searching for jobs just because they’re getting bloated benefit checks.  But policymakers must not ignore proven economic theories about the impact of government income transfers on labor force participation.

And…that’s a long, wonky way of me saying that I ultimately agree with both Gov. Reeves and Speaker Gunn in their opposition to extra federal benefit checks for the unemployed.