The coronavirus pandemic isn’t likely to end this month, nor is the massive job disruption it has caused.
The clock is ticking, however, on the nation’s most effective economic response to the pandemic. The $600-a-week federal boost to unemployment insurance checks is scheduled to end by July 31.
That income cliff, if it’s allowed to happen, will cause hardship for the 20 million Americans collecting unemployment checks, and their loss of purchasing power would deepen the recession. Congress, meanwhile, doesn’t appear close to an agreement on how to help jobless workers.
Democrats want to keep paying the $600 supplement. Republicans oppose an extension, saying the generous benefit discourages people from returning to work. Instead of paying people to stay home, they propose a return-to-work bonus of $450 a week for folks who leave the unemployment rolls and find a job.
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There’s some truth to the Republicans’ argument. With the supplement, laid-off Missourians receive up to $920 a week, which is more than many people earned at their jobs. Employers report that some workers are reluctant to return.
A back-to-work bonus could solve that problem, but wouldn’t help workers whose job prospects remain dim. “These people lost jobs through no fault of their own,” says Washington University economics professor Steven Fazzari. “Hotels, restaurants, travel agencies — this crisis is so concentrated in certain industries that the idea people just need to buck up and get a job isn’t terribly relevant.”
In other words, the bonus would work only if employers were ready to bring all their workers back, and we aren’t there yet. “There isn’t going to be enough expansion in other parts of the economy that’s going to absorb workers from the affected industries,” Fazzari says.
He suggests that Congress could combine the two ideas: Keep supplementing unemployment benefits while also rewarding people who accept jobs. That would reduce the incentive to stay at home, but might raise a fairness issue: We’d be boosting incomes of returning chefs and flight attendants, but doing nothing for the essential health care and grocery workers who’ve been working hard all along.
Unemployment benefits totaled $106 billion in May, of which roughly two-thirds was paid by the federal government. That’s a lot of money to take out of the economy all at once.
“If this benefit were cut off it would be a large negative shock to the (hopefully) recovering economy, equivalent by itself to a nasty recession,” Fazzari says.
The best approach would be to phase out the $600 payments as the job market improves. The amount could be cut to $400 a week when unemployment falls below 10%, for instance, and to zero if it falls below 6%.
An analysis by the Congressional Budget Office lends some support to the Republicans’ worries. By August, it estimates, five of six people on unemployment would be receiving a benefit that exceeds their potential earnings.
The CBO even says that if the more generous benefits continue into next year, the disincentive-to-work effect would start to slow the economy.
The agency adds, though, that stopping the benefits by July 31 would reduce economic output in the second half of this year. The immediate income loss would be devastating at a time when jobs remain scarce.
The CBO’s analysis points to a logical compromise: Extend the supplemental benefits, but phase them out gradually with a goal of ending them early next year. Let’s hope Congress can put partisan differences aside and find a sensible solution.