Quitters Prosper

One fix we can implement that could help wage growth: allow workers who quit their jobs to collect unemployment insurance.

By Nick Bunker

Tagged EconomicsUnemployment

Numbers from Friday’s jobs report underscores a persistent problem for the U.S. economy: Wages aren’t growing fast enough for most Americans. According to the data for December, the average wage for all workers grew at 2.5 percent over the last year, before accounting for inflation. Healthy wage growth would be somewhere in the range of 3.5-4 percent.

How can we get to that level of wage growth? A number of proposals have been floated by economists and politicians across the political spectrum. But there’s one minor fix we can implement that could have major implications: allow workers who quit their jobs to collect unemployment insurance

The unemployment insurance program is a partnership between the federal government and the states. The federal government sets the standards for the program and the states are allowed to tweak their program within those lines. Right now, workers are only eligible for unemployment insurance if they quit their jobs for reasons on a set list—including workplace safety, discrimination, and harassment—and nearly all unemployment insurance is claimed by laid-off workers. States could take action on quitters right now and allow for experimentation, though movement at the federal level would help more workers in the short-run.

To see why giving quitters a cushion can be helpful, it’s instructive to think back to the 1990s. The late 1990s inspire nostalgia for a variety of reasons, with perhaps strong, sustained, and diffuse wage growth being the most pleasant memory for U.S. workers. How did this happen? Primarily because policymakers let the nation’s economy run hot and the unemployment rate get as low as 3.8 percent.

This period of full employment was a significant boost to wage growth up and down the wage ladder in the United States. Full employment, in essence, makes sure that the labor market is a seller’s market. If demand for labor is high, all workers have a strong negotiating stance against employers. When the labor market is tight, workers are often hired away by higher-paying companies, causing their current employer to hire another employed worker or perhaps an unemployed one. That process boosts wages, but even workers that stay put can use a potential job with another employer or the possibility of quitting to find another job as leverage.

Full employment makes sure that the labor market is a seller’s market.

Fast forward to today. The full employment of the 1990s is a thing of the past, and policymakers haven’t been eager to bring it back. Without a tight labor market, how can we boost workers’ bargaining power and help boost wage growth? One way is to make the consequences of not having a job—namely quitting—less severe, therefore making workers more likely to move in that direction. More concretely, federal policymakers can make workers who quit their job—for any reason—eligible for unemployment insurance.

Leading models of the labor market show that unemployment insurance lets unemployed workers take more time to find a job that’s the right fit, resulting in higher productivity and higher wages. Allowing quitters to collect unemployment insurance benefits would create a similar dynamic for workers with jobs. They would be able to leave a job and search for a new one if they see problems at their current job, and create a better match with an employer.

Making this change might seem like an overreaction to the particular circumstances after the Great Recession, but the U.S. labor market has seen a structural decline in quitting and moving between jobs over the past 15 years. The rate at which today’s workers quit is below its level in 2000, according to U.S. Bureau of Labor Statistics data, and job-to-job moves have also been on the decline over the same time period. So spurring workers to move jobs more often seems to be an issue with more than passing relevance.

At the same time, simply making workers who quit eligible for unemployment insurance seems unlikely to promote idleness, as some might counter-argue. These workers would still be bound by the time restrictions under which the program currently operates, such as the current 26-week limit on collecting benefits in most states. What’s more, unemployment benefits on average replace only 47 percent of a worker’s previous earnings, so quitting won’t exactly lead to a life of luxury. Policymakers could make the benefit more generous, however, if they wanted to further entice workers to quit.

This change would affect the financing of the program, as taxes on employers that fund the program are based on how likely they are to lay workers off. With more recipients, that’ll leave the program underfunded. A possible fix would be for federal policymakers to increase the minimum taxable wage base for state unemployment insurance taxes from its current level of $7,000.

Of course, such a change to one program isn’t going to recreate the full benefits of a high-pressure labor market. But in the absence of monetary and fiscal policy that promotes full employment, policymakers need to think creatively about ways to boost workers’ bargaining power and wage growth.

Read more about EconomicsUnemployment

Nick Bunker is a policy analyst at the Washington Center for Equitable Growth.

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