Should Congress extend the CARES Act supplemental UI benefits of $600 per week?
The CARES Act provided supplemental unemployment insurance benefits of $600 a week to all workers who qualify for benefits. These benefits expire at the end of July. Should these supplemental benefits be extended? Why or why not?
Congress should extend the $600-per-week supplemental unemployment insurance (UI) benefits.
Many Americans are relying on the supplemental UI benefits (as well as the $1,200 direct stimulus payments) to stay afloat. In June, the unemployment rate was 11.1%—lower than in April (14.7%) and May (13.3%), but still much, much higher than the February rate of 3.5%.[1] Many Americans were in precarious financial positions before the recession.[2] In June, Bhutta et al. (2020) found that “nearly half of families who lose their income for six months would not be able to cover their expenses due to low levels of liquid saving and standard UI benefits that do not fully replace income.”[3]
The cash assistance provided by the CARES Act is “keeping the economy from cratering further” (Nunn, Parsons, and Shambaugh 2020). Garcia and Smith (2020) articulate this idea well:
If people have money to spend on groceries, then the grocery store can afford to pay its own workers. And the grocery store will also order more food from farmers. And that means that the farmers will have money to order equipment from manufacturing companies and so on. Consumer spending is the lifeblood of an economy.
An economy is a web of relationships and forming such relationships is expensive. Consider, for example, the costs associated with hiring employees, vetting renters, and starting new businesses. The cash assistance provided by the CARES Act is keeping economic relationships in place. By doing so, it is setting up the economy to recover faster once the pandemic is over.[4]
Could $600 per week be so generous as to discourage people from working? According to Ganong, Noel, and Vavra (2020), “two-thirds of eligible workers can receive benefits which exceed lost earnings and one-fifth can receive benefits at least double lost earnings.”[5][6] Mitman and Rabinovich (2020) thus suggest “lowering [the supplemental UI benefits] as the economy starts to reopen” and replacing them with a reemployment bonus.
Perhaps Congress should have avoided supplementing UI benefits in the first place. Many European countries are subsidizing wages instead; this approach might maintain employer-employee relationships more effectively. Alternatively, larger direct stimulus payments (larger than $1,200) in lieu of generous UI benefits would avoid disincentivizing work.
However, at this point Congress should “stay the course” rather than engineer a new policy. Extending the CARES Act benefits is conceptually simple, and simple policies are more politically tenable as well as more likely to be implemented well.
The need for the $600-per-week supplemental UI benefits remains. These benefits should be extended.
Notes
[1] Unemployment today remains higher than it was during the Great Recession, when unemployment peaked at 10.0% in October 2009.
[2] Bhutta and Dettling (2018) estimated that only 76% of American households have $400 or more in liquid savings. Similarly, the Federal Reserve’s (2019) “Report on the Economic Well-Being of U.S. Households in 2018” found that 4 in 10 American families would be unable to pay an unexpected $400 expense out-of-pocket. Needless to say, households in such a precarious financial positions would likely need the $600-per-week supplemental UI benefits to meet basic needs.
[3] Bhutta et al. (2020) also raised concerns about equity: “Families working in industries with the highest unemployment rates in April . . . would be least likely to be able to cover several months of expenses . . . . Similarly, lower-income families and minority families tend to be less well-equipped to weather the downturn.”
[4] Cheng et al. (2020) studied current unemployment trends and found that:
Rate of reemployment decreases with time since job loss . . . . [E]mployment relationships are durable in the short run, but . . . employment gains requiring new employment matches may not be as rapid and may be particularly slow for hard-hit groups including Hispanic and Black workers, youngest and oldest workers, and women.
Similarly, Carroll, Slacalek, and White (2020) add that:
If the lockdown is short-lived, the combination of expanded unemployment insurance benefits and stimulus payments should be sufficient to allow a swift recovery in consumer spending to its pre-crisis levels. If the lockdown lasts longer, an extension of enhanced unemployment benefits will likely be necessary if consumption spending is to recover.
[5] Bhutta et al. (2020): “For a full-time worker who was earning the federal minimum wage prior to losing their job, the increased UI benefits would be nearly three times their previous weekly wages.”
[6] That number includes this author, and he personally finds the $600-per-week supplemental UI benefits to be a disincentive to work. But he decided to remain employed because UI benefits are limited and cannot be claimed indefinitely.
That experience matches up to an analysis by Bhutta et al. (2020): “Although UI benefits will generate an increase in income for many families experiencing job loss, this boost to incomes is temporary and families will . . . save the ‘extra’ income if they anticipate unemployment spells to last beyond July.” Bhutta et al. argue that “consumption expenditure declined over 13% in April even while personal income (including transfers) increased by 10%” because recipients of the supplemental UI benefits are saving any extra income.
References
Bhutta, Neil, Jacqueline Blair, Lisa J. Dettling, and Kevin B. Moore. July 2020. “COVID-19, the CARES Act, and Families’ Financial Security.” https://doi.org/10.2139/ssrn.3631903. https://ssrn.com/abstract=3631903.
Bhutta, Neil, and Lisa Dettling. November 19, 2018. “Money in the Bank? Assessing Families’ Liquid Savings using the Survey of Consumer Finances.” FEDS Notes. Board of Governors of the Federal Reserve System. Accessed July 21, 2020. https://doi.org/10.17016/2380-7172.2275. https://www.federalreserve.gov/econres/notes/feds-notes/assessing-families-liquid-savings-using-the-survey-of-consumer-finances-20181119.htm.
Board of Governors of the Federal Reserve System. May 28, 2019. “Dealing with Unexpected Expenses.” Report on the Economic Well-Being of U.S. Households in 2018. The Federal Reserve System. Accessed July 21, 2020. https://www.federalreserve.gov/publications/2019-economic-well-being-of-us-households-in-2018-dealing-with-unexpected-expenses.htm.
Carroll, Christopher D., Jiri Slacalek, and Matthew N. White. July 8, 2020. “Modeling the Consumption Response to the Cares Act.” ECB Working Paper No. 20202441. https://ssrn.com/abstract=3645999.
Cheng, Wei, Patrick Carlin, Joanna Carroll, Sumedha Gupta, Felipe Lozano Rojas, Laura Montenovo, Thuy D. Nguyen, Ian M. Schmutte, Olga Scrivner, Kosali I. Simon, Coady Wing, and Bruce Weinberg. July 2020. “Back to Business and (Re)employing Workers? Labor Market Activity During State COVID-19 Reopenings.” NBER Working Paper No. 27419. https://doi.org/10.3386/w27419. https://www.nber.org/papers/w27419.
Ganong, Peter, Pascal J. Noel, and Joseph S. Vavra. May 2020. “US Unemployment Insurance Replacement Rates During the Pandemic.” NBER Working Paper No. 27216. https://doi.org/10.3386/w27216. https://www.nber.org/papers/w27216.
Garcia, Cardiff, and Stacey Vanek Smith, “This Weekend's (Fiscal) Cliffhanger,” July 20, 2020, in The Indicator from Planet Money, produced by Darius Rafieyan, https://www.npr.org/transcripts/893297452.
Mitman, Kurt, and Stanislav Rabinovich. June 29, 2020. “Optimal Unemployment Benefits in the Pandemic.” CEPR Discussion Paper No. DP14915. https://ssrn.com/abstract=3638019.
Nunn, Ryan, Jana Parsons, and Jay Shambaugh. May 13, 2020. “Incomes have crashed. How much has unemployment insurance helped?” The Brookings Institution. Accessed July 21, 2020. https://www.brookings.edu/blog/up-front/2020/05/13/incomes-have-crashed-how-much-has- unemployment-insurance-helped/.
Rothwell, Jonathan. May 27, 2020. “The effects of COVID-19 on international labor markets: An update.” Middle Class Memos. The Brookings Institute. Accessed July 25, 2020. https://www.brookings.edu/research/the-effects-of-covid-19-on-international-labor-markets-an-update/.
U.S. Bureau of Labor Statistics. June 2020. “The Employment Situation—June 2020.” U.S. Department of Labor. Last Modified July 2, 2020. https://www.bls.gov/news.release/pdf/empsit.pdf.