Editor’s Note: Rachel Greszler is a research fellow specializing in economics and entitlements in The Heritage Foundation’s Hermann Center for the Federal Budget. The opinions expressed in this commentary are her own.
To address the precipitous loss of work and wages caused by the pandemic, Congress significantly expanded unemployment insurance benefits in March. Lawmakers extended the duration of benefits, made them available to tens of millions of previously ineligible self-employed and gig-workers and increased payments by $600 per week.
Those $600 bonus payments are slated to expire on Friday. Some lawmakers want to extend them, but doing so would be a mistake. Unemployment pays more than work for about two-thirds of the unemployed. Not only will the additional benefits have to be repaid by future workers, but they’ve made it hard for some businesses to get their employees back. Instead of extending an across-the-board $600 benefit, policymakers should implement a more targeted, partial federal match to states’ unemployment benefits and provide a boost to partial benefit payments for those who are rehired with reduced hours and incomes.
I propose a 40% federal match, which would boost a typical state benefit (which is usually between 40% and 50% of the unemployed person’s pre-layoff earnings) to between 56% and 70% of previous earnings. Over time, the federal match could phase out. This switch would provide continuing support to the unemployed, while eliminating the short- and long-term drags on the economy caused by the $600 benefit.
And for unemployment systems, it would be a simple switch — multiplying the state benefit by 1.4 instead of adding $600.
It’s true that the extra $600 per week has injected a lot of money into the economy — so much so that a JPMorgan analysis said the payments may contribute to “a remarkable 0.5% increase in personal disposable income this year.” We also saw Americans’ savings surge in April and May, from about 8% per month to 32% and 23%, respectively. But the $600 has some harmful side effects.
Sending $600 to everyone who is receiving unemployment benefits is costing upwards of $10 billion per week, as there are over 16 million people receiving regular state unemployment benefits and up to another 13 million who were self-employed, part-time workers or otherwise did not qualify for regular benefits and are now receiving Pandemic Unemployment Assistance benefits, both of which qualify for the $600.
Although we’re putting the tab on the country’s credit card — the US debt — and interest rates are currently extremely low, the bill will have to be paid, with interest, by future taxpayers. A partial federal match would still have costs, but by bringing the median replacement rate down from 134% of workers’ previous earnings to between 56% and 70%, the costs would be much lower, and yet unemployment would still provide higher benefits than what Americans’ typically get.
There are also immediate consequences, inequities and abuses that have come with the $600 bonus payments.
An analysis by researchers at the University of Chicago estimated that 68% of individuals now receiving unemployment benefits could be getting more than they did when they were actually working; and an estimated 20% could be getting more than twice their usual pay.
That’s a potentially huge problem for employers, especially if Congress extends the $600 benefits.
Nearly two out of every three small businesses worry that their employees won’t return to work because they don’t want to lose the extra money. Ordinarily, workers cannot continue receiving benefits while refusing a job offer, but the CARES Act provides 11 new eligibility criteria through which individuals can continue receiving benefits.
The longer that unemployment pays more than employment, the more costly it will become for already struggling businesses to stay open. The Congressional Budget Office explained how businesses would respond to higher costs that would come from extending the $600 benefits: “…Some businesses set wages higher than they would have without the benefits. Some businesses reduce their output and raise their prices above what they would otherwise have been, and others close. Over the longer term, some businesses begin to use machinery and equipment that allows them to use less labor.” Businesses closing their doors and replacing workers with machines means fewer jobs.
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The $600 benefit is also inequitable. For example, a worker who was making $36,000 before being furloughed now collects hundreds of dollars more per week than co-workers who remained on the job. A partial federal match would mean that individuals are always financially better off by working.
Not surprisingly, a majority of Americans think Congress should let the $600 bonus expire, according to a survey by the Foundation for Government Accountability.
There are other problems as well. The generous benefit and lax certification standards have triggered significant fraud. Maryland found a “massive, sophisticated, criminal enterprise,” resulting in fraudulent claims of more than $500 million. Washington state reports up to $650 million in fraudulent claims. Reducing the benefit size would make fraud less lucrative and therefore less attractive, and now that the initial impetus to get claims out the door quickly has receded, policymakers could augment more stringent certification standards.
Unemployment benefits can help bridge a gap, but they can’t support workers forever.
Taking money from future taxpayers to support policies that discourage people from working and that take jobs out of the economy won’t help the recovery or individuals’ and families’ long-term wellbeing. But getting Americans safely back to work will.
It’s time for Congress to focus on fostering employment opportunities instead of unemployment incentives, and replacing rigidity with flexibility so that more Americans have work options that meet their needs.