As Unemployment Nears 10%, Here’s How Congress Can Soften the Blow

COMMENTARY Jobs and Labor

As Unemployment Nears 10%, Here’s How Congress Can Soften the Blow

Apr 2nd, 2020 3 min read
COMMENTARY BY
Rachel Greszler

Research Fellow in Economics, Budget and Entitlements

Rachel researches and analyzes taxes, Social Security, disability insurance, and pensions to promote economic growth.
A lot has happened since last week’s unemployment claims were recorded. Axel Bueckert / EyeEm / Getty Images

Key Takeaways

Unemployment claims spiked by 6.6 million last week.

The $600 bonus unemployment benefit means that a majority of Americans could make more money unemployed than working. 

This one commonsense fix could prevent millions of lost jobs and help reboot the economy once this public health crisis subsides.

Unemployment claims spiked by 6.6 million last week, meaning more Americans became unemployed during one week than the total already unemployed before COVID-19 hit the U.S.

This marks a 3,000% increase compared to the levels of February’s weekly initial claims of unemployment, and it means the unemployment rate likely is around 9.7%—approaching three times the record-low 3.5% in February.

A lot has happened since last week’s unemployment claims were recorded. 

For starters, Congress passed and President Donald Trump signed into law the CARES Act, including provisions intended to prevent unemployment as well as a counterproductive incentive to increase unemployment. 

And then the president announced a 30-day extension to the nation’s “slow the spread” guidelines, with governors across many states continuing exceptional measures, including school and business closures.

If April 30 remains the date at which some businesses begin opening back up again, many of them may be able to keep their workers employed even if they’re not working temporarily. 

In large part, that’s because the CARES Act’s new Paycheck Protection Program provides partially forgivable loans through the Small Business Administration. 

Starting April 3, businesses and nonprofit organizations with fewer than 500 employees can apply to receive loans, as can those in the accommodations and food services industries (so long as they don’t employ more than 500 at one location).

If lenders are allowed to use automated approval processes to get money out the door quickly, the program could provide meaningful relief within a week or two. 

The purpose of the loans is to help employers maintain their operations and employees, despite a slowdown or complete shutdown in operations. Businesses can use the funds for payrolls, utilities, rent, and the interest on mortgages and other debt payments. So long as employers maintain their payrolls, an amount equal to up to two and a half months of typical monthly payroll costs can be forgiven. 

For larger employers, however, loans available through the CARES Act cannot be forgiven and they impose significant conditions that will deter many businesses from applying. 

On net, more than half of U.S. workers are employed by small businesses and accommodation and food services companies that are eligible for forgivable loans. That should help prevent layoffs.

The catch, however, is a counterproductive provision in the CARES Act that provides an additional $600 per week in unemployment insurance benefits. 

It makes sense in light of the temporary health crisis to hold workers harmless—providing 100% unemployment benefits compared to the typical 50%—but it doesn’t make sense to pay people more than they earned when employed.

The $600 bonus unemployment benefit means that a majority of Americans could make more money unemployed than working. 

The median full-time worker in America would earn $2,300 more through four months of unemployment than they would while working. 

And someone who works 30 hours per week at the minimum wage would gain $8,500 through four months of unemployment. In fact, such folks would make more in four months of not working than in an entire year of working.  

Typically, employers have to lay off workers in order for them to receive unemployment benefits. 

But the CARES Act places the ball in workers’ court. One of 11 provisions through which workers may qualify for unemployment insurance benefits is if “the individual has to quit his or her job as a direct result of COVID-19.” 

That’s a broad provision that could make almost anyone eligible for benefits—even if they could maintain their employment connection while temporarily not working through measures such as mandated paid sick and family leave or the Paycheck Protection Program. 

Moreover, now that employers know that workers actually can come out ahead through unemployment, they almost certainly will lay off some workers who they otherwise might have tried to retain.

But unemployment isn’t good for workers. Not only does it mean a loss of health insurance, which is particularly troublesome during a public health crisis. Being unemployed also can reduce future income and employment opportunities.

Moreover, if more workers sit on the sidelines until the $600 bonus unemployment benefit goes away July 31, businesses won’t be able to ramp production back up once it’s safe to do so. The economy will languish instead of rebound.

If policymakers want to prevent the unemployment rate from spiking to what the Federal Reserve projected could be 32%, they should fix the botched $600 bonus unemployment benefit by capping it at 100% of workers’ previous wages. 

This one commonsense fix could prevent millions of lost jobs and help reboot the economy once this public health crisis subsides.

This commentary has been corrected to state that being unemployed, not uninsured, can reduce future income and employment opportunities.

This piece originally appeared in The Daily Signal