This income growth is a testament to the swift action by Congress, the Trump administration and the Federal Reserve in response to the pandemic. We can thank in particular the expansion of unemployment benefits to cover more out-of-work Americans and provide an additional $600 per week on top of traditional benefits. (The $1,200 per person stimulus checks helped, too.)
This increase in unemployment benefits expires at the end of the month, however, and lawmakers are at odds over how to move forward. Neither allowing the benefits to expire, as some Republicans have suggested, nor continuing them in their current form, as many Democrats have proposed, makes sense at this stage of the pandemic and related economic crisis. Fortunately, there is a third option that can continue to help those who lack jobs while also encouraging a return to work.
First, some context. Most state unemployment programs cover 40 to 50 percent of someone’s lost wages. Given the nature of the current downturn — in which companies shut down at the government’s request, to serve a public-health goal — lawmakers wanted to instead provide 100 percent coverage. But tailoring the benefits precisely to match people’s salaries through antiquated and rickety state-run unemployment systems proved impossible in many cases. Instead, Congress opted for a rough fix: deliver a $600 bonus payment so that the average unemployment benefit would roughly equal the average wage — about $1,000 per week, or $50,000 per year.
This $600 weekly bonus — on top of base state benefits — has been a lifeline for millions of families, while also supporting the economy by boosting consumption and ensuring timely rent and mortgage payments. But the bonus is both a blessing and a curse. Because the program pays most workers more to stay out of the workforce than to return to it, the bonus could ultimately slow the economic recovery and worsen long-term unemployment.
Though the bonus was designed with the average wage in mind, layoffs turned out to be concentrated among lower-wage professions; as a result, most recipients are making more from unemployment than they were at their jobs. One study found that two-thirds of beneficiaries make more from unemployment than work, with the average worker making 34 percent more. And that’s the average worker. Someone who was making $15 an hour in New York is now making the equivalent of $22 an hour on unemployment — a 50 percent increase. And about a fifth of those on unemployment are making twice as much to not work as they did on the job.
It doesn’t take an economist to understand the problem here. If we keep paying workers more to stay home than return to work, we’ll never see a complete economic recovery. To be sure, these excessive benefits are far from disastrous in a world of unsafe working conditions, rising infection rates and double-digit pandemic-induced unemployment. But as the economy moves further into recovery and the public health crisis ultimately subsides, these generous benefits will make it harder for employers to hire workers — especially new workers — and would thus lead to growing long-term unemployment.
Long-term unemployment will not only weaken the overall economy, but also take a high financial, economic, emotional and social toll on those who experience it. Such effects can last a lifetime; they even affect the future earnings of the children of the unemployed. (This would likely still be true even with the near-term financial gain of higher-than-usual government payments.)
Yet allowing benefits to end abruptly as scheduled will cause tremendous harm, not just for individuals, but for the economy that relies on their spending. So what do we do?
Rather than allow benefits to end abruptly (or continue indefinitely), they could be gradually phased out based on economic conditions. Transitioning the bonus from $600 to $500 per week starting next month would make sense, as it would more accurately reflect the intended 100 percent average wage-replacement rate. Beyond that, Congress could implement automatic rules that incrementally scale down the benefit as the economy reopens and recovers. One option would be to reduce each state’s bonus as their level of employment rises — bringing it to zero once the state or the nation reaches pre-pandemic employment.
Congress could also give states the flexibility to cap the flat-dollar bonus as a percent of wages to prevent total benefits from exceeding wages. For example, the $500 benefit could be capped at 50 percent of a beneficiary’s lost salary. To encourage states to take this approach, the federal government could assist states in upgrading their antiquated unemployment systems and allow states to share in the budget savings from this new cap.
Additionally, we should structure benefits to actively encourage re-employment as areas safely reopen. This could be accomplished with return-to-work bonuses, or subsidies to employers to maintain a worker’s income level upon rehiring. These approaches, however, favor those who lost their jobs over those who kept them. An even better approach would be to swap some portion of the unemployment bonus for more direct aid, along the lines of the $1,200 checks from the spring. As the weekly unemployment-insurance bonus dropped from $500 to $300, for example, all American adults — working and nonworking alike — would receive regular checks worth the equivalent of $200 per week. This approach would maintain unemployment income for those out of work, increase income for those who do work, and further stimulate spending in the economy.
Finally, once the economy recovers, we should make sure we pay for the cost of the covid-19 rescue over time and address our record levels of debt.
As a start, we could increase the amount of income subject to the 0.6 percent federal unemployment payroll tax. That tax only applies to a worker’s first $7,000 of income. By comparison, the Social Security tax applies up to $137,700 and the Medicare tax has no limit.
More fundamentally, we need to think about when to transition from expanding borrowing to address the current crisis to reducing our massive debt to prevent the next one. Just as increased unemployment benefits should automatically phase out as the economy recovers, thoughtful revenue increases and spending reductions should phase in as we approach full employment.
With so many people out of work and so much uncertainty around the reopening of the economy, it’s clearly too early to shut off fiscal relief. But we also can’t let the very policies that are jump-starting the economic recovery stifle its continuation. A well-designed unemployment program can help sustain incomes today and grow them tomorrow.