How to Solve our Unemployment Crisis? Just Ask a Mom and her 4-Year-Old Daughter

Who would have thought that a young little girl was smarter than a Ph.D. Economist?

During a visit to a fast-food restaurant, I stumbled upon a lady talking to someone that appeared to be a store manager and telling him that she was unable to come back to work because she wasn’t feeling well. And while, no one could really verify her statements, I did notice a cynical facial expression from the manager as he tried to convince her to accept a reduced work schedule.

But at this point, her little daughter, who appeared to be about 4 years old, jumped up and said, “Mommy why can’t we tell the truth as you always tell me to do, and tell the man what you told me, that if you come to work, your check will be less money and you won’t be able to buy me the clothes and toys that I need?” She also said, “Please tell the man that if he lets you keep the extra money you are getting, you can come back to work and buy me all the things I need.”

At that moment I cringed and became extremely embarrassed along with the young lady and her Manager. No one uttered a word for about 30 seconds until the manager politely told the young lady, “lets step aside and finish this conversation elsewhere.” Soon thereafter, I picked up my food order, hid my face and walked out of the restaurant as quickly as I could.

But as Economist, I said to myself, “Wow, that is a policy solution that people in Washington, D.C. should heed from a 4-year-old that apparently received her Ph.D. in Economics from the University of Reality!”

In early April 2021, the Bureau of Labor Statistics (BLS) reported that the Establishment Survey used to compute non-farm payroll employment, remained 8.4 million below its pre-pandemic levels (Feb. 2020). In contrast, the Household Survey (used to compute the unemployment rate) stood at 7.9 million below its pre-pandemic readings.

It is important to note that these employment shortfalls, don’t even include the 2.0 million people that dropped out of the labor force since the start of the pandemic. As we all know, when a person drops out of the labor force and hasn’t looked for a job for 30 days or longer, they are not counted as unemployed. And although the BLS reported a sharp drop in the unemployment rate to 6.0% (in an April 2021 release) from a peak of 14.8% (in April 2020) -- it still remains far above its pre-pandemic 3.5% reading!

The trade-off for many remains painful. Stay home and collect more money in unemployment insurance (UI) benefits (especially when you add in the extra $300 payment) or go back to work and earn less. Since the regular UI benefits cover 50% or less of regular wages – they are clearly not the culprit in this disincentive crisis. However, for about 37% of low income individuals (based on a government estimate), the extra $300.00 (which was even higher in the 2020 CARES ACT), means that these low-wage workers will earn more money by staying at home instead of returning to work until this special UI program ends.

Interestingly, all economic models, tell us that when that happens, an individual’s “reservation wage,” that properly incentivizes an employee to return to work will be much higher than it was before the pandemic! This suggests that many of these laid off workers will have clear incentives to refuse their employer’s offer to return to work as business conditions improve. There is nothing sinister about this decision or even an indication that a person is lazy, it just reflects how a rational economic agent would react under these circumstances.

How do we resolve this crisis?

According to our 4-year child prodigy, the solution is simple, and is no different that the advice that the good witch in the Wizard of Oz gave Dorothy, when she told her that she had the power to return home all along by just clicking her heels.

With over $5 trillion in economic relief payments already approved to be spent on various constituents across the U.S. economy, (since the start of the pandemic), it can’t be too difficult to solve this problem without spending an additional penny!

Just allow workers to earn their wages if they return to work, plus the additional $300.00 they would have received if they stayed home. After all, this program will end soon, anyway. After spending $5 trillion to get the U.S. economy back on its feet – it is almost impossible to argue that this child prodigy is misguided.

In contrast, if we fail to listen to our wise 4-year-old prodigy and do nothing, -- firms across the U.S. will remain paralyzed and unable to hire enough workers to re-open the economy without bidding wages higher. Higher wages will surely exacerbate our inflation risks that were highlighted by the larger than expected, 4.2% yearly rise in the March Producer Price Index (revealed by a government release on April 9, 2021).

And, if we don’t do this and the economy recovers more slowly and causes us to consider spending even more to stimulate the economy --- our national budget deficit will deteriorate further and cause the U.S. economy further collateral damage.

So why not spend, what we have already approved, and allow firms to rehire more workers and ensure that our little girl continues to get the clothes and toys that her mommy promised, while the rest of us prepare for an unimpeded U.S. economic recovery!