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Trump administration considering 'back to work' cash bonus — but would it work?

President Donald Trump is considering "some kind of bonus" that would "create an incentive to work," National Economic Council Director Larry Kudlow said.
Image: Unemployment
People who lost their jobs wait in line to file for unemployment insurance in Fayetteville, Ark., on April 6, 2020, following an outbreak of the coronavirus.Nick Oxford / Reuters file

While Congress debates whether, how,or how much to further support workers and the pandemic-devastated Main Street economy, economists warn that time is running out.

"The evidence we have from the Great Recession is that stimulus money stopped too short, and that actually ended up elongating the recession," said Jeff Strohl, director of research at Georgetown University's Center on Education and the Workforce.

A Democratic proposal would extend the expanded unemployment benefits that are giving 30 million jobless Americans up to an additional $600 a week through the end of the year. The program, part of the $2 trillion CARES Act stimulus package passed in March, is scheduled to expire at the end of July. President Donald Trump and some Republican lawmakers point to the surprising growth of 2.5 million jobs in May as reason to allow the program to lapse.

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National Economic Council Director Larry Kudlow labeled the $600 weekly payments a "disincentive," arguing that low-paid workers would opt to stay home and earn more than they would if they re-entered the workforce. The White House and some congressional Republicans have proposed offering some form of "back to work" bonus.

"The president is looking at a reform measure that would still provide some kind of bonus for returning to work, but it will not be as large, and it will create an incentive to work," Kudlow told CNN on Sunday without offering further details.

One proposal, from Sen. Rob Portman, R-Ohio, would give returning workers an extra $450 a week. Rep. Kevin Brady, R-Texas, suggested a $1,200 "hiring bonus" that would allow workers to keep their $600 payments for a further two weeks once they were employed again.

"Policymakers have to navigate this difficult balancing act. There will be a point in time where it makes sense to push unemployed workers back into the labor force, but whether that's right now is an open question," Glassdoor senior economist Daniel Zhao said.

While generous unemployment assistance can slow re-entry into the workforce, the extreme demand-side shock characterizing this recession makes it much likelier that workers are drawing unemployment because they can't find jobs, Strohl said.

Job openings are down by about 30 percent from pre-crisis levels. "This is still heavily depressed," Zhao said. "Right now, the ratio of unemployed workers to job openings is just totally out of whack."

Strohl pointed out that nearly half of job losses — 46 percent — have occurred among workers with high school educations or less, making the supplemental payments a critical stopgap. "That $600 is going to make or break a household there," he said.

Regular unemployment programs, which are administered by the states, often replace less than half of what workers earn. Lawmakers settled on $600 because that amount came roughly closest to making workers whole.

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Although less severe than the current unprecedented plunge in employment, the Great Recession's depth and duration yield some insight into how people behave when they lose their jobs. As with today, flagging demand was a key factor driving unemployment higher. In 2010, the San Francisco Federal Reserve found that if the demand is there and jobs are available, people will go back to work, with those who receive expanded unemployment benefits remaining out of work for only 1.6 weeks longer than those who don't.

While enhanced unemployment benefits have "shielded millions of people from the financial consequences of unemployment," turning off the stimulus tap too quickly would "trigger a financial hard landing for everyone who has not been called back to work," said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Economists from the Center for American Progress, a left-leaning think tank, suggested that most out-of-work Americans spent their benefits on necessities, helping to stimulate demand and drive economic activity. "Many households simply do not have the resources to continue to pay their bills and put food on the table in the absence of unemployment insurance benefits," they wrote.

With an estimated 70 percent of the country's economic activity generated from consumer spending, economists said that is likely the case today, as well. "Putting money in the pockets of Americans has allowed some amount of economic activity to continue," Zhao said.

Cutting off those payments too soon could kneecap any economic recovery, Strohl said. "That $600 is more likely to be supplementing consumer demand, which would lead to a speedier recovery," he said. "With the demand shock we're having, this sounds like a case of penny-wise, pound-foolish."