There has been much discussion about whether the now expired $600 per week enhanced unemployment benefits paid under the CARES Act served to disincentivize workers from returning to their lower paid jobs. While logic would seem to suggest that workers would elect to sit on the sidelines for more money, the reality for the most part, may not be what you would think.
One of the difficulties with ferreting out the truth is that most people may know someone who elected to forgo returning to work in favor of temporarily higher pay. According to a Franklin Templeton-Gallup Economics Of Recovery Study, among the unemployed taken between August 3-11, 2020, survey results “suggest relatively few workers would choose to stay home due to greater federal assistance rather than head back to work.”
While the survey results may seem counterintuitive, they make sense when viewed from the perspective of loss aversion. The key concept here is humans experience much more pain from a loss, than they do enjoyment from a gain.
Here are two instances of how loss aversion works:
- The most significant flaw in the CARES Act is it set temporary deadlines for aid that were not based in reality. The Pandemic Additional Compensation component of the CARES Act providing the additional $600 per week unemployment benefit expired as of July 31st. The specter of a short-term gain, was greatly outweighed by the probability of losing your job if you elected not to return to work.
- As of this writing there are approximately 27 million unemployed Americans. If a worker elects not to return to work in favor of a temporarily higher payday, loss aversion is likely to kick in as they realize that the temporary gain in higher unemployment benefits would be outweighed by the permanent loss of their income, due to a lot of other unemployed workers competing for their job.
Although humans are complicated beings, having a better understanding of our default motivations via behavioral economics, can help to make sense of situations that, at first blush, don’t quite seem to make sense.