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Paying for Unemployment Benefits or Aid in Wages?

Posted on June 1, 2020
William Hays Weissman
William Hays Weissman

William Hays Weissman is a state and local tax practitioner in California.

In this installment of Taxing Times, Weissman discusses how the federal government and states are addressing unemployment during the current pandemic, arguing that their approach could have unintended negative consequences.

The current pandemic has created unprecedented levels of unemployment, but not for the usual reasons. The unemployment rate in February was only 3.5 percent, below average historical unemployment rates since the late 1950s.1 By April it had risen to 14.7 percent, a rate not seen since the Great Depression.2 Credit and liquidity are not problems, as is often the case when unemployment is high, nor was demand necessarily problematic. Rather, government closure orders shut down production, which caused unemployment to fall disproportionately on the lowest-income earners. The reason is fairly simple: Only a little more than one-third of jobs can be done from home, and those jobs tend to be the highest paid.3 Jobs in factories, restaurants, and hotels generally require physical presence at the location, even if the back office functions that support those jobs do not.

The federal government’s multifaceted response to the cessation of production largely comprises two approaches: direct aid to individuals and indirect aid to individuals by propping up businesses. The first approach included $1,200 stimulus checks to individuals over 18 who made less than $75,000, phasing out at $99,000 (and double the limits for married couples), plus $500 per dependent child. It also included an additional $600 per week in unemployment benefits through July 31.4 The second approach compensated employers who continued to pay wages, whether through a dollar-for-dollar tax credit for sick and family leave wages, loans to businesses to pay wages, or tax credits and deferrals on employers’ Social Security taxes paid on wages.

There’s nothing wrong with providing relief to individuals in need of assistance; indeed, it is one of the primary obligations of any society.5 Further, the federal government’s use of an existing delivery method — the unemployment system — also seems to make sense because it does not require new infrastructure or new rules to implement. Moreover, while the reason for high unemployment may be novel, unemployment and its consequences are not. Government has had experience dealing with the economic and social consequences of unemployment since at least the 1930s, and has worked to ameliorate them ever since. As explained in 1969 by Herbert Stein, who became chair of President Richard Nixon’s Council of Economic Advisers in 1972, high unemployment is a problem mostly because its effects are concentrated on so few:

Unemployment is regarded as an evil primarily because of its distributional effects rather than because of its effects on total output. We would not worry nearly so much about 1 or 2 percent additional unemployment if the effects were evenly distributed over the whole population. But the fact that its burdens are concentrated on relatively few, especially if the additional unemployment is prolonged, is the main reason for concern about it.6

While concern about the disproportionate impact of unemployment remains today, the federal government’s use of the unemployment system to fight the pandemic leaves key questions unanswered. Principle among them is whether the approach was properly targeted to provide the right kinds of relief to the “correct individuals,” defined by the unemployment system’s basic standard of being unemployed through no fault of their own.

One key tenet of the unemployment system is that those unemployed through no fault of their own remain able and available to work. Another tenet is that they accept suitable work. The federal government pandemic response offered states flexibility to suspend these requirements. For example, the Department of Labor issued guidance on the suspension of the “able and available for work” and “searching for work” requirements on March 22 in Unemployment Insurance Program Letter (UIPL) No. 13-20, which was further explained by UIPL 16-20 on April 27.

The origins of the modern requirement that an individual be able and available to work can be traced back to at least the practical problems that arose regarding work following the Black Plague in Britain in 1348.7 Nearly one-third of the population died, and substantial labor shortages abounded. To force everyone able to work to do so, King Edward III issued the Ordinance of Labourers in 1349, which explained the problem and the solution in plain terms:

Because a great part of the people, and especially of workmen and servants, late died of the pestilence, many seeing the necessity of masters, and great scarcity of servants, will not serve unless they may receive excessive wages, and some rather willing to beg in idleness, than by labor to get their living; we, considering the grievous incommodities, which of the lack especially of ploughmen and such laborers may hereafter come, have upon deliberation and treaty with the prelates and the nobles, and learned men assisting us, of their mutual counsel ordained:

That every man and woman of our realm of England, of what condition he be, free or bond, able in body, and within the age of threescore [60] years, not living in merchandise, nor exercising any craft, nor having of his own whereof he may live, nor proper land, about whose tillage he may himself occupy, and not serving any other, if he in convenient service, his estate considered, be required to serve.8

To further ensure that every able-bodied individual worked, laws were enacted to prevent illegal begging and giving alms to otherwise able-bodied beggars. In doing so, the notion that work is a societal requirement — as opposed to just a personal need — took hold.

While the severe labor scarcity abated over time as the population rebounded, the penalties imposed on begging were kept in place to control peace in local communities. Over the next 250 years variations on the prohibitions against begging and providing vagrants aid were enacted, all under the assumption that those who were physically able to work should do so, and would have no problem finding sustainable work if so desired. Charity was only needed to care for those who could not care for themselves. Experience proved that this assumption was a bit optimistic. Henry VIII passed a law in 1535 to establish a system to provide employment and relief to the poor, thus beginning a system of general public welfare, but also a kind of quid pro quo between work and financial assistance from the government.9 President Bill Clinton would invoke a similar concept in his pledge “to end welfare as we know it” by enacting “welfare to work” as part of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996.

To address the severe economic depression Britain faced at the turn of the 17th century, Queen Elizabeth I proclaimed the Act of 1601 for the Relief of the Poor, known more generally as the English Poor Laws. The general framework established by this act remained largely in place until it was repealed in 1948. The English Poor Laws divided the poor into three groups: vagrants, involuntary unemployed, and the helpless. The 1601 act was a refinement of prior laws enacted after the Statute of Labourers, which required parents to care for their children and grandchildren and made local government the administrative unit responsible for enforcement — giving it the power to tax residents to create almshouses and provide other forms of assistance. Also, it required the locality to set “to work all such persons, married or unmarried, having no means to maintain them, and use no ordinary and daily trade of life to get their living by.”10

The 1601 act was followed in 1662 with the Law of Settlement and Removal, which in effect established residency requirements and allowed local governments to force dependents to leave a parish and return to their own original borough (that is, town). In dividing the poor into three groups, the law judged those worthy of help, such as orphans, the elderly, and handicapped, and those who were not, such as drunks and the lazy, with the latter group subject to fines and punishment. The basic structure of these laws emphasized the “‘Principle of Local Responsibility’ as safeguarded by two corollaries: the ‘Principle of Settlement and Removal’ and the ‘Principle of Primary Family Responsibility.’ This trinity influenced colonial development profoundly.”11

This general framework for dealing with all indigent, including those capable and incapable of work, sailed from England to America with the first colonists. For example, the New Plymouth Colony adopted rules in 1642 requiring every town to “make competent provision for the maintenance of their poor according as they shall find most convenient and suitable for themselves.”12 Laws were also enacted to address those “suspected to live idlely and loosely, and to require an account of how they live,” and if such account was lacking, to allow the governor to punish them as shall be “just and equal.”13

Similarly, a 1647 Rhode Island law required each town to “provide carefully for the relief of the poor, to maintain the impotent, and to employ the able.”14 As epitomized by these early laws, the principle of local responsibility — coupled with a requirement that those able to work do so — was incorporated into America’s legal framework from the beginning.15

Economic theory that is used to explain unemployment holds that “the most important determinant of unemployment is the wage rate. Unemployment is created when existing wage rates exceed the level necessary to clear the labor market. At lower wages, the quantity demanded is greater, because the additional revenue a worker brings to a firm, or marginal revenue product, those lower the greater the quantity of labor.”16 This theory echoes King Edward III’s observation in the Statute of Labourers that high-wage demands put the labor market out of balance. The equilibrium point is now generally called the natural rate of unemployment.17

In his General Theory of Employment, Interest and Money (1936), John Maynard Keynes accepted the wage theory of employment, but did not agree that markets alone would find the equilibrium point between prices and wages because a decline in wages does not result in proportionate aggregate declines in demand through lower prices for goods. Thus, to decrease unemployment, there needs to be not merely a reduction in the wage rate, but a stimulating of the aggregate demand. Further, he noted that workers’ lack of bargaining power affects their ability to affect employment through wage concessions:

If, indeed, labour were always in a position to take action (and were able to do so), whenever there was less than full employment, to reduce its money demands by concerted action to whatever point was required to make money so abundant relatively to the wage-unit that the rate of interest would fall to level compatible with full employment, we should, in effect, have monetary management by the Trade Unions, aimed for employment, instead of by the banking system.18

There were two principal ways to stimulate the necessary aggregate demand: lowering taxes (to increase the individual’s after-tax disposable income that could be used to stimulate demand) or increasing government spending (for the same general purpose). Later theories debated various influences on this general wage theory of unemployment, such as whether inflation was good or bad for unemployment — not to mention the impact of interest rates (for example, whether high interest rates incentivize savings and thus reduce demand).

It is largely accepted that the Federal Reserve’s failure to increase liquidity and expand the money supply prolonged the Great Depression; the Fed even raised interest rates in 1931.19 But neither inflation nor liquidity is a problem today, as the Fed has pumped trillions into the economy, including through the purchase of corporate bonds.20 Inflation has remained below 2.5 percent since 2012.21 However, another response to the Black Plague in the 1340s Great Depression in 1930s is in play today: higher wages.

One of the initial responses to the Great Depression was to raise wages, believing that the Depression could be overcome because higher wages would stimulate demand. Henry Ford famously raised wages to $5 a day, in part to ensure that his own workers could afford to purchase goods (including one of his automobiles). Edward Filene of Filene’s Department Stores in Boston and Gerard Swope of General Electric held similar views. When the Great Depression, began President Hoover, along with prominent businessmen such as Ford and Filene, sought to keep wages elevated to ensure that workers could afford to purchase goods and services.22

However, evidence suggests that high wages, maintained in part by the Hoover administration’s encouragement of the business community’s maintenance of high wages and by policies such as the Smoot-Hawley Tariff Act, helped prolong the Depression. Other policies — such as the National Industrial Recovery Act, which tended to set high minimum wages; the Social Security Act, which imposed taxes on wages; and the Fair Labor Standards Act, which also set a new minimum wage — also likely prolonged the Depression by keeping wages above their market equilibrium point.23 Recent studies further show negative employment impacts from higher wages. For example, one study looked at the impact of minimum wage increases on the restaurant industry, finding that it increased closures of lower-end restaurants.24 The study’s authors concluded that “a $1 increase in the minimum wage leads to a 14 percent increase in the likelihood of exit for the median 3.5-star restaurant,” although 5-star restaurants are likely unaffected.25 As one small San Francisco restaurant owner pointed out, there is only so much you can charge for tamales.26

Turning then to the pandemic, the federal government’s approach was to juice unemployment by increasing the benefit by an additional $600 per week, which amounts to $15 per hour for 40 hours of work. It also happens to be the difference between average unemployment benefits in 2019 of $370 per week and average wages of $970 per week.27 Before that increase, unemployment generally replaced around 50 percent of one’s weekly wages. This low wage rate provided an incentive to actively seek work while providing a minimum amount of income replacement.

The unemployment boost was intended to replace all wages, but it does much more. For individuals making less than $15 per hour, the additional unemployment benefits represent a pay increase; in some cases, a substantial increase. According to one recent study, in most states the income from not working (that is, the unemployment benefits received) will increase to over 100 percent of income for working. Mississippi went from replacing 31 percent of wages through unemployment benefits to 119 percent of wages.28

We’ve been down the “high wage policy” road before. As Richard K. Vedder and Lowell E. Galloway summarize the implications of Hoover’s high-wage policy in response to the Depression:

The banking crisis of late 1930 began what was to be a rather steady shrinkage of the stock of money. The evidence is rather convincing that the banking crisis was largely caused by the consequences of the ill-conceived high-wage policy. . . . Not only did the Hoover high-wage policy raise, rather than lower, unemployment, it also contributed mightily to the rapidly deteriorating financial condition of American business after the stock-market crash of 1929. By mid-1930 a massive profit squeeze was under way. Before tax profits fell 63 percent from 1929 to 1930.29

2020 is not 1929 and, as noted, some failures of that period — notably a lack of expansionary monetary policy — are not being repeated. Further, measures established during the Great Depression, such as deposit insurance and abandonment of the gold standard, create a different environment today than 90 years ago. But a Hoover high-wage policy as a solution is eerily similar to the federal government’s additional $600 in unemployment benefits, calling into question whether it will prolong unemployment.

Another difference between 1929 and today is that unemployment did not exist until the mid-1930s. However, the same requirements that the unemployed be able and available for work and accept work remain a feature of the current response, except that they don’t to the extent states choose not to enforce them. As the closure orders subside, what will happen to the requirements that workers be able and available to work and accept suitable work?

Kurt Huffman, owner of ChefStable in Portland, Oregon, which operates 20 restaurants, noted that after closing his restaurants on March 15, he had trouble calling back furloughed workers a few weeks later when he had retooled for takeout and delivery. Line cooks make between $15 and $22 per hour, but to match unemployment wages, he would have to pay at least $25 per hour.30 The resistance to returning to work at the lower wages was obvious. Huffman noted, “What we realized was that it made no sense for them to come back. Our line cooks are now making $1,000 a week instead of $640 a week in wages.”31

The federal government is not unaware of this problem and has taken steps to counteract the anticipated behavior that the federal government’s high unemployment “wage replacement” payments encourage. For example, UIPL 16-20 lists several FAQs that suggest refusing to return to work renders one ineligible for Pandemic Unemployment Assistance (PUA):

34. Question: If an individual refuses to return to work when called back by the employer because he or she wanted to receive unemployment benefits, would he or she be eligible for PUA?

Answer: No. If the individual refused work in order to file for unemployment benefits, he or she is not unemployed, partially unemployed, or not able or not available to work for one of the COVID-19 related reasons listed in section 2102(a)(3)(A)(ii)(I) of the CARES Act. Thus, the individual would not qualify for PUA.

48. Question: How does an individual meet the able and available provisions of PUA if he or she is ill due to COVID-19, caring for someone with COVID-19, or unable to work due to travel restrictions due to COVID-19?

Answer: An individual satisfies the able and available provisions by certifying each week that he or she is not able or available to work because one of the COVID-19 related reasons listed in section 2102(a)(3)(A)(ii)(I) of the CARES Act, but he or she would otherwise be available.

49. Question: Is an individual who refuses an offer of work eligible for PUA?

Answer: No, unless the individual is unable to work as a direct result of COVID-19. Eligibility for PUA requires that the individual be able to work and available to work within the meaning of applicable state law, unless the individual is unable or unavailable to accept the offer of work because of a reason listed under section 2102(a)(3)(A)(ii)(I) of the CARES Act, he or she would not be eligible for PUA.

50. Question: If the jurisdiction’s stay at home order due to the COVID-19 emergency is lifted and an employer has called his or her employees back to work, is an individual who refuses to return to work due to a general fear of exposure to the coronavirus still eligible for PUA?

Answer: To qualify for PUA, the individual must be unemployed, partially unemployed, or unable or unavailable to work because of a COVID-19 related reason listed in section 2102(a)(3)(A)(ii)(I). An individual who does not go to work due to general concerns about exposure to COVID-19, and who does not meet any of the other COVID-19 related criteria for PUA, is not eligible for PUA because general concerns about exposure to COVID-19 is not one of the reasons listed in section 2102(a)(3)(A)(ii)(I).32

It is perhaps ironic that the federal government created substantial incentives not to work by making it financially more beneficial than working, which in turn is likely to put more businesses under and increase unemployment, while at the same time also seeking to limit those wages and reduce unemployment. Why the federal government would choose to take these internally inconsistent positions is hard to view as anything other than expediency of trying to put money in individuals’ hands without considering the consequences.33

This might not be so bad if the federal government controlled the unemployment system’s determinations of eligibility, but it doesn’t; the states do. And how are states dealing with eligibility? So far, most guidance has implicitly suggested that people should express fear of COVID-19 and refuse to work if they want to maintain their heightened unemployment benefits from the federal government. For example, the Connecticut Department of Labor’s FAQs provide the following explanation:

I received an offer to return to work, but I am concerned about the safety of the position in light of COVID-19. Will I be denied unemployment for that week?

Unemployment benefits are paid on a week to week basis. If the Governor’s restrictions are still in place regarding essential and nonessential employment, or you have concerns regarding your specific place of employment, you may have good cause to refuse your employment as it is not suitable due to possible exposure to the COVID-19 virus, and would not be denied benefits on that basis.34

The California Employment Development Department (EDD) has issued COVID-19 unemployment insurance (UI) FAQs along the same lines:

I was laid off due to the COVID-19 stay-at-home order, and I am currently receiving regular UI benefits. I have been asked to return to work, but my employer does not provide essential services or services in one of the sectors reopening now under Stage 2. Will I lose my UI benefits if I refuse to return to work because I am afraid of contracting COVID-19 in the workplace?

No, this should not affect your continued receipt of UI benefits. An individual is disqualified for UI if they refuse to accept “suitable” employment when offered. Under California law, the EDD will consider whether the particular work is “suitable” in light of factors such as the degree of risk involved to the individual’s health and safety. You would have good cause to refuse to return to work if the business does not provide an essential service and is not in one of the industries reopening now under the state’s Resilience Roadmap for reopening. This is because the stay-at-home order is still in effect outside of essential or reopened industries.35

It’s impossible to know how any claim for unemployment will be reviewed and determined in light of these FAQs. What is likely, however, is that higher wages from federal unemployment benefits will keep the unemployment rate higher than it would be for longer than it would be absent the payment, and also make it harder for businesses to find individuals willing to work. In this way, even as the federal government directs states to police claims to ensure only those eligible receive the benefits, states perhaps have less incentive to police as vigorously as the federal government might want.

What does any of this have to do with taxes? As with all public benefit questions, the answer lies in who pays. The federal government is picking up the cost of the additional $600 per week, and thus the state UI funds are not responsible for that cost. The Congressional Budget Office estimates the extra $600 for 16 weeks (April through July 31) will cost about $139 billion, based on 17 million individuals receiving those additional benefits.36 While these estimates are likely to be low, at least the federal government will recoup part of what it pays out because unemployment benefits are subject to federal income tax.37

California paid $3.4 billion of unemployment benefits in the week ending May 9.38 Someone must pay for all that government spending. By drawing from the general federal treasury, some states may avoid the disastrous impact to their own UI funds that came following the Great Recession. For example, California’s UI fund went insolvent in 2009, and did not regain solvency for nine years.39 It could be much, much longer this time unless someone else is paying the bill.

Which brings me back to being able and available to work. If the federal government is paying the cost of the enhanced unemployment benefits, do the states really have incentives to worry about whether the requirement to be able and available to work is strictly enforced? Seemingly not. Will at least some businesses have to remain closed in full or part because of the higher unemployment “wages” from not working? Unfortunately, yes. If so, will the requirement to be able and available to work be a hollow gesture? Probably so. If so, is what the federal government created really unemployment as we know it? Not really.

Rather than unemployment, what the federal government actually created is a short-term form of universal basic income or “aid in wages.” Like Hoover’s high-wage policy, this approach has been tried before, with poor outcomes. In 1795 England adopted a system of wage support called “Speenhamland.”40 Under that system:

Subsidies in aid of wages should be granted in accordance with a scale dependent upon the price of bread, so that a minimum income should be assured to the poor irrespective of their earnings. . . . It introduced no less a social and economic innovation than the “right to live,” and until abolished in 1834, it effectively prevented the establishment of a competitive labor market. . . . [However, the] “right to live” had proved a death trap to [the working poor]. The paradox was merely apparent. . . . no laborer had any financial interest in satisfying his employer, his income being the same whatever wages he earned. . . . Within a few years the productivity of labor began to sink to that of pauper labor, thus providing an added reason for employers not to raise wages above scale.41

While under Speenhamland wages sank, the middle class was gutted, and aid in wages kept many at subsistence levels, Congress cannot be accused of the same here, given that unemployment benefits will replace more than 100 percent of wages for many. The real question is what happens on August 1? Will individuals’ wages drop, and if so, will they demand an increase in wages? Will employers refuse? Will the government be forced to step in to prop up wages — whether through increase minimum wage laws, price controls, or some other method — and in doing so, replicate the problems of Speenhamland? And most importantly, who is going to pay for this? By using the unemployment system for a purpose for which it was not designed, and forcing states to administer it, the federal government perhaps gets whatever outcomes it deserves. Based on history, the potential outcomes are not looking good.

FOOTNOTES

1 Bureau of Labor Statistics (BLS), “TED: The Economics Daily,” March 11, 2020; see also BLS, “Databases, Tables & Calculators by Subject.”

2 BLS Press Release USDL-20-0815, “The Employment Situation — April 2020,” May 8, 2020.

3 Jonathan I. Dingel and Brent Neiman, “How Many Jobs Can Be Done at Home?” NBER Working Paper No. w26948 (Apr. 2020).

4 The HEROES Act, passed by the U.S. House of Representatives on May 15, would continue this $600 payment until January 2021. States such as California have also proposed extending the payment until 2021. See A.B. 1107. As of this writing, these provisions have not been enacted.

5 Arguably it is a basic tenet of the Judeo-Christian tradition as well, as expressed in biblical passages such as Proverbs 3:27-28: “Do not withhold good from those to whom it is due, when it is in your power to act. Do not say to your neighbor, ‘Come back tomorrow and I’ll give it to you’ — when you already have it with you.”

6 Herbert Stein, “Unemployment, Inflation and Economic Stability,” in The Battle Against Unemployment (1972), at 24.

7 Of course, the concept of working for subsistence can be traced back to the Bible as well. See, e.g., Psalms 128:2: “When you shall eat of the fruit of your hands, You will be happy and it will be well with you.” Moreover, poor relief was a primary function of the church through medieval times. See Larry Cata Backer, “Medieval Poor Law in Twentieth Century America: Looking Back Towards a General Theory of Modern American Poor Relief,” 44 Case W. Res. 871 (Spring/Summer 1995), at 939-965.

9 Stefan A. Riesenjeld, “The Formative Era of American Public Assistance,” 43 Calif. L. Rev. 175, 177-180 (1955).

10 Id., at 178 (quoting 43 Eliz. Ch. 2 (1601)).

11 Id.

13 Id., at 64.

14 Riesenjeld, supra note 9, at 213.

15 Lawrence Friedman, History of American Law (2d ed. 1985), at 213.

16 Richard K. Vedder and Lowell E. Galloway, Out of Work: Unemployment and Government in 20th-Century America (1997), at 14.

17 Id., at 16. The natural rate of unemployment has changed over time, having risen a few percent from the early 1900s to the late 1900s. The natural rate of unemployment holds when price inflation is what is expected, meaning that individuals’ real wages — what they can use to purchase goods and services — is not more or less than what they believe their wages can purchase. Id., at 246-264.

18 John Maynard Keynes, General Theory of Employment, Interest and Money (1964), at 267.

19 E.g., Milton Friedman and Anna Jacobson Schwartz, The Great Contraction: 1929-1933 (1963); John V. C. Nye, “The Depression and the Failure of Impersonal Trust: What Have We Really Learned from the Great Depression?” Mercatus Center Working Paper No. 09-1 (Aug. 2009), at 8.

20 Jeanna Smiakek and Peter Eavis, “With $2.3 Trillion Injection, Fed’s Plan Far Exceeds Its 2008 Rescue,” The New York Times (Apr. 9, 2020); Nick Timiraos, “Fed Ramps Up Bond Buying, Indicating Much Larger Purchases Are Likely,” WSJ.com (Mar. 19, 2020).

22 Vedder and Galloway, supra note 16, at 89-97.

23 Id., at 128-146. While acknowledging that monetary policy failures are important to understanding the Great Depression, Vedder and Galloway find that “the monetary decline was in large part a by-product of the Hoover high-wage policy.” Id., at 113.

24 Dara Lee Luca and Michael Luca, “Survival of the Fittest: The Impact of Minimum Wage on Firm Exit,” Harvard Business School NOM Unit Working Paper No. 17-088 (Aug. 13, 2018).

25 Id.

26 Michael Saltsman, “The Minimum Wage Eats Restaurants,” WSJ.com (May 9, 2017).

27 Amelia Thomson-DeVeaux, “Many Americans Are Getting More Money From Unemployment Than They Were From Their Jobs,” FiveThirtyEight (May 15, 2020).

28 Ella Koeze, “The $600 Unemployment Booster Shot, State by State,” The New York Times (Apr. 23, 2020).

29 Vedder and Galloway, supra note 16, at 113.

30 Andrew Dorn, “What Happens When Unemployment Benefits Pay More Than Your Job?” KGW8 News (Portland) (Apr. 25, 2020); see also Kurt Huffman, “Our Restaurants Can’t Reopen Until August,” WSJ.com (Apr. 21, 2020).

31 Dorn, supra note 30.

33 Not lost on many, it will be a backdoor means for Democrats to get the $15 minimum wage enacted because it will increase pressure on businesses to raise wages when the enhanced benefits stop. Eric Morath, “Coronavirus Relief Often Pays Workers More Than Work,” WSJ.com (Apr. 28, 2020). However, as noted, those higher wages are likely to lead to less employment, not necessarily higher wages, exacerbating — rather than alleviating — the problem.

34 Connecticut Department of Labor, FAQs.

35 California Employment Development Department (EDD), “Coronavirus 2019 (COVID-19) FAQs.”

36 Congressional Budget Office, letter to Senate Budget Committee Chair Mike Enzi, R-Wyo. (Apr. 27, 2020), at 10.

37 IRC section 85. Unemployment benefits were not taxed before 1979 but were made partially taxable in the Revenue Act of 1978. The Tax Reform Act of 1986 eliminated the partial taxation and made all state unemployment benefits taxable. Congress made unemployment benefits taxable to put them on equal footing with the wages they replaced as well as to raise revenue, but also to eliminate the disincentive to work caused by the favorable tax treatment of unemployment benefits over wages. See Joint Committee on Taxation, “General Explanation of the Tax Reform Act of 1986 (H.R. 3838, 99th Congress; P.L. 99-514),” JCS-10-87 (May 4, 1987), at 29-30. Some states tax unemployment benefits, while others do not. Maybe all states should follow the federal government’s lead.

38 EDD press release, “Unemployment Benefit Payments Top $12 Billion in California,” May 14, 2020.

39 EDD, “October 2019 Unemployment Insurance (UI) Fund Forecast.” Perhaps foreshadowing the current situation, a July 2019 Department of Labor report noted that California was the least solvent of all state UI Funds, and “even a tiny economic downturn would quickly drive it into the red.” See Dan Walters, “California’s Unemployment Fund the Least Solvent in Nation,” The Mercury News, July 29, 2019.

40 See Karl Polanyi, The Great Transformation: The Political and Economic Origins of Our Time (1944), at 81-107.

41 Id., at 82-83.

END FOOTNOTES

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