When the COVID-19 pandemic brought the U.S. economy to a partial halt in March, it made sense for Congress to expand unemployment insurance benefits.
It never made sense, however, to provide an across-the-board $600-a-week bonus unemployment benefit as part of that boost. The purpose of unemployment benefits, after all, is to replace a portion of workers’ wages to help them get by after a job loss through no fault of their own. Accordingly, unemployment benefits usually replace between 40 percent and 50 percent of the previous earnings for workers.
As society opens back up, the $600 benefit has created hurdles for businesses across the country as they attempt to reopen and recover.
If workers can receive more money from unemployment benefits than by working, there’s a clear incentive to remain unemployed. That’s not good for workers or businesses in the long run — as the unintended consequences of the recently added unemployment benefit show. Yet, Democrats are pushing to extend into 2021 the $600 weekly bonus — set to expire July 31 — as Capitol Hill debates a new coronavirus relief package ahead of the deadline.
As some lawmakers pointed out when the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, first passed in March, an extra $600 a week meant many workers could make more from unemployment than from their regular paychecks. Indeed, about 70 percent of individuals received more than their usual wages, and about 20 percent earned two times or more their usual wages.
There’s no rationale for paying people more than 100 percent of their previous earnings (insurance companies don’t compensate people for more than 100 percent of their losses). While the bonus funds will eventually be spent and provide a boost to the economy, that will come at the cost of later extracting all that money plus interest from the economy.
Still, other lawmakers at the time of the passage of the earlier stimulus bill thought that excessive benefits wouldn’t be a problem and that they might even have the advantage of forcing businesses to raise workers’ wages. But raising wages requires raising prices, employing fewer workers, cutting back on investments or taking actions (like reducing other workers’ compensation) that make them less competitive.
With many small businesses across the United States struggling to regain their customers, raising prices would only make it harder for them to survive. Consider some of the hardest-hit industries, such as restaurants, retail stores and day care centers. According to a survey last month by Yelp, 35 percent of shopping and retail establishments — 9,682 stores in total — and 53 percent of restaurants — 12,710 in total — have shut down permanently since March.
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For those businesses still hanging on, consider the impact of having to increase wages to compete with the $600 benefit. Matching unemployment benefits would require a restaurant owner to raise wages from $10 per hour to $20.50 (unemployed workers would qualify for the equivalent of $20 per hour in unemployment benefits as well as lower taxes on unemployment). With five full-time employees and typical restaurant profit margins of 5 percent, that would require increasing sales by $45,500 each week, or an extra $2.3 million per year — a near- impossible feat at any time, let alone during a pandemic in which people are avoiding restaurants.
When it comes to child care, the cost already exceeds college tuition in a majority of states; raising day care prices is not a viable option. That’s especially true as some parents are reluctant to send their children back to day care centers in the first place. Moreover, parents who have lost their jobs do not need child care, nor do those who are using government-financed paid leave or unemployment benefits (both of which Congress allowed under coronavirus legislation) to stay home with their children.
The bottom line is that as society opens back up, the $600 benefit has created hurdles for businesses across the country as they attempt to reopen and recover, and extending the benefits will only increase those hurdles. A survey from the last week of May showed that 65 percent of small businesses are worried that their employees won’t return to work.
Even before businesses started opening up, the $600 benefit affected whether companies stayed open, how much they produced, and which employees stayed connected to their employers versus being furloughed or laid off, as some businesses took the $600 benefits into account and laid off more workers than they otherwise would have.
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One spa owner who received a CARES Act Paycheck Protection Program loan in order to keep her employees on the payroll said she faced a “firestorm of hatred” from some of her staff, who wanted to receive the more lucrative unemployment benefits instead of their usual paychecks while the spa was closed. And the manager of an after-school gymnastics center said that the $600 benefit “kind of pitted us against our employees a bit.”
The $600 benefit even caused some businesses, like a coffee shop in Harlan, Kentucky, that otherwise would have remained open to instead shut down. And it pushed others, like Anthony Timberlands pine mills, to cut production as many workers chose unemployment over work.
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There’s also been significant fraud and abuse, thanks to the lax certification standards to document the validity of workers’ claims in order to get payments out quickly. A report from the Department of Labor’s inspector general noted that the lax standards have left the program “highly vulnerable to improper payments and fraud.” Washington state reports up to $650 million in fraudulent claims. Maryland just detected a “massive, sophisticated criminal enterprise” resulting in over $500 million of such claims.
And the universal nature of the $600 benefit — workers who lost $100 or $1,000 in weekly income are equally eligible — has caused significant manipulation of partial-benefit or workshare programs. In Portland, Ore., for example, the school district and teachers union teamed up to devise a strategy — Friday furloughs— whereby the city saves the $460 per teacher in average daily district pay as teachers get Fridays off and gain a $730 unemployment benefit (about $130 in partial state benefits plus the $600 federal benefit). Federal taxpayers, meanwhile, foot the $600 part of the bill and local students lose 20 percent of their weekly education.
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The significant gap between the roughly 32 million Americans who are receiving unemployment insurance benefits and the 17.8 million Americans who report being unemployed also suggests that many Americans are receiving unemployment benefits while they also are still employed and working at least partial hours. More than half of states allow workers to collect partial unemployment benefits while working reduced hours, and the lack of certification may mean that some workers are continuing to collect benefits even while working.
While the $600 benefit has boosted incomes, its extension would have significant long-term consequences. According to the Congressional Budget Office, House Democrats’ proposal to continue the extra $600 weekly payment through January would reduce employment in 2020-2021; cause economic output to be lower next year; and contribute to more business closures.
In fact, extending the $600 benefit would not only be unhelpful to the economy and to the long-term well-being of unemployed workers (who could face lower incomes and physical and mental consequences from longer unemployment), it would also be unfair to current workers who continue to labor while some to get paid less than those on unemployment.
At some point, either precipitous spending cuts or extreme tax increases will be required to repay America’s spending excess — the $600 benefit is currently costing us about $19 billion per week. Policymakers should replace the across-the-board $600 bonus benefit with a more targeted partial federal match to states’ unemployment benefits and enable more partial benefits.
There’s also been significant fraud and abuse, thanks to the lax certification standards to document the validity of workers’ claims in order to get payments out quickly.
Proportional benefits would help workers without adding excessive costs for taxpayers and without disincentivizing work. For a worker who typically makes $800 per week and receives $400 from their regular state unemployment benefit, the federal match would boost their benefit to $560 — less than the current $1,000 they receive, but still 40 percent more than unemployment usually pays.
Moreover, the federal government could provide support to states that do not yet have partial benefit programs to help establish them. This would be particularly helpful now as workers may have job options but fewer hours and lower incomes.
However they’re distributed, though, unemployment benefits are only a Band-Aid. The cure is getting Americans back to work. Policymakers can help accomplish that by fostering employment opportunities and replacing rigidity with flexibility so that more Americans have work options that meet their needs
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