With federally enhanced unemployment insurance due to phase out at the end of July and a pandemic that's showing no signs of abating, the status of unemployment benefits in America has quickly become a front-burner issue.
Congress is meeting this week and next to hammer out a new relief measure that may carry an extension of the Cares Act provision, which offers those collecting unemployment insurance benefits an additional $600 per week, on top of funds already provided by the state. That provision is due to expire at the end of July.
The stakes are high. For the 32 million Americans now collecting unemployment benefits, a loss of the subsidy could mean not being able to pay their rent or mortgage or make car payments or even purchase groceries. For business owners, the consequences of losing the subsidy are murkier.
Entrepreneurs like Skyler Reeves, whose Prescott, Arizona-based Vivili Hospitality Group laid off half its 100-person staff in March as a result of the pandemic, say the subsidy has made rehiring more difficult. Some former workers may be making more money from unemployment insurance than they would if they were working.
"People have told me to my face that they would rather get unemployment than return to work," says Reeves, who operates three restaurants and a catering business in the tony enclave. In Arizona, he points out, an unemployed person can earn up to $840 a week. That's the maximum regular state unemployment benefit of $240, plus the $600 federal unemployment benefit. In other states like California and New York, where state benefits are more generous, the maximum payout is north of $1,000 a week. Technically, employees who refuse work, are supposed to lose benefits. Employers have often declined to report the refusal, which makes policing the problem more difficult.
Yet if the subsidy were to expire without anything to replace it, some fear a far worse eventuality.
If millions of Americans suddenly have less money to spend, they'll likely be less inclined to make discretionary purchases--and that could further depress businesses and the economy more generally, suggests Mark Cohen, an independent retail analyst and adjunct business professor at Columbia University. "The customer that doesn't have any discretionary funds is only going to support his or her needs, which is food and whatever degree they have to pay for shelter."
Research bears this out. After analyzing 182,000 households that received direct deposits of unemployment benefits into their bank accounts between 2014 and 2016, researchers showed that spending dropped off by 6 percent at the start of unemployment. It fell another 1 percent for each month under the program and 12 percent at the point of benefit exhaustion. These results are from an oft-cited 2019 study of consumer spending during unemployment, which appeared in the July issue of The American Economic Review.
Of course, this study didn't factor in the $600 federal subsidy. It's unclear whether spending would have dropped off as precipitously if participants had been collecting--and possibly saving--an extra $600 a week during their tenure on the unemployment rolls. The U.S. savings rate broke a record during the pandemic.
It is widely understood, however, that an extension of the current program would deliver an economic boost. In his recent testimony before congress, economist Jason Furman noted that the $600 weekly subsidy would boost U.S. GDP by 2.8 percent and support just under 3 million jobs in the third quarter of this year. If benefits were extended through the middle of 2021, Josh Bivens, director of research at the nonpartisan Economic Policy Institute, estimates GDP would grow 3.7 percent a quarter on average and support the employment of 5.1 million workers.
Less is known about what could be accomplished by changing the payout, but there are plenty of options for lawmakers to consider.
A June report from the Aspen Institute's Economic Strategy Group suggests replacing the current federal unemployment insurance subsidy with one that's more targeted. Under the plan, the payments would vary depending on the state benefit, up to an additional $400 a week. The supplement would be tied to the state's unemployment rate and phase out as employment ticks up.
Another proposal before congress calls for doing away with enhanced benefits entirely and installing a hiring bonus. The Paycheck Recovery Act, proposed in mid-May, offers low-wage workers--those earning less than $40,100 annually--a $1,500 rehiring bonus upon returning to work. If the enhanced unemployment insurance subsidy gets extended, the rehiring bonus would fall to $1,200.
For his part, Reeves acknowledges the predicament in which unemployed people find themselves, particularly those who want to work but can't for one reason or another. Maybe a former employer is unable to reopen, or caregiving duties are forcing some workers to the sidelines.
Even so, he is wise to the inefficiencies of the current system. "Before all this, when the unemployment rate was so low, it made sense that you post a job and no one would show up," says Reeves. "But now when you post that job and you get no one--when there are 30 million people unemployed--it just doesn't make any sense."