Politics & Policy

Will Pandemic Jobless Benefits Make Recovery Harder?

A deli closed due to the coronavirus outbreak in Brooklyn, N.Y., March 26, 2020. (Stephen Yang/Reuters)
The new unemployment-insurance program could be too much of a good thing.

The U.S. labor market is officially in free fall. Weekly jobless claims hit 3.3 million last week, smashing all previous records. The record was broken again this morning, when the Labor Department confirmed that 6.6 million people filed claims for unemployment benefits in the week ending March 28.

For perspective, weekly jobless claims during the Great Recession topped out at only 665,000, with a peak unemployment rate of 10 percent. Jobless claims from just the last two weeks already put us past that. Based on some simple back-of-the-envelope math, an economist at the St. Louis Fed recently estimated that the U.S. unemployment rate could easily exceed 30 percent by the end of this quarter. That’s Great Depression territory.

Complicating matters is the fact that public officials are actively trying to discourage work. Take the new Pandemic Unemployment Assistance program, which passed into law last week as part of the $2.2 trillion relief package. States that participate in the program are required to waive the usual job-search requirements for unemployment-insurance (UI) recipients, drop the one-week waiting period for new applicants, and dramatically expand eligibility to reach anyone affected by COVID-19. In return, the federal government will pick up the cost and add an extra $600 per week to the base benefit (equal to half the state’s regular unemployment benefit) for up to four months.

This $600 per week add-on — equivalent to a $15-per-hour full-time income — means that many workers will soon be eligible to receive more in unemployment compensation than they would make on the job. Realizing this, Senator Lindsey Graham (R., S.C.) nearly derailed the legislation, suggesting that it must have been a drafting error. In reality, it was a compromise required by the backwardness of most state UI systems, which run on decades-old programming that cannot be easily modified.

The question remains whether, in the context of a global pandemic, unemployment benefits that pay better than your job should be considered a feature or a bug. To paraphrase my colleague, Will Wilkinson, the economic crisis is subordinate to the epidemiological crisis. To solve the former we must first solve the latter, which involves encouraging people to stay at home — and away from work — as much as possible.

And yet there are different ways to achieve this goal, with different risks involved. Graham, for his part, was widely mocked for apparently misunderstanding how unemployment insurance works. After all, you can’t simply quit your job and claim UI, so what’s the risk?

Except you can quit your job and claim the new UI benefit, at least under the letter of the law. Indeed, eligibility is nearly all-encompassing, covering anyone who provides “self-certification” that their ability to work has been disrupted for “COVID-19 related reasons.” This includes gig workers, independent contractors, and the self-employed. Only those who can telework or who have paid leave through their employer are explicitly excluded.

It should go without saying that no government in history has ever designed an unemployment-insurance program quite like this — one that virtually anyone can qualify for, and with benefits on par with the median weekly earnings of full-time workers. Will grocery-store employees and hospital administrative staff quit en masse, preferring four months of tax-free income to working under potentially hazardous conditions? We just don’t know, and anyone who claims to know is pretending.

Even the Left seems to be of two minds. While most are confident that the temporary nature of the benefit will keep employment rates from collapsing, some are rejoicing at “the possibility of millions of low-wage workers rebelling against their employers by quitting for $600/week super-UI,” as Vox’s Dylan Matthews tweeted. Which is it?

I personally am uncertain, but a worst-case scenario is easy to imagine: Essential services will go unstaffed, and businesses that would otherwise operate will falter. Some firms will retain workers by raising wages, but most won’t have the extra cash to compete against four months of generous paid leave. Then, once quarantines begin to lift, a fraction of Pandemic UI recipients will choose to stay on “extended benefits” because their former employer has disappeared. Temporary unemployment will become structural, and a jobless recovery will drag out for decades.

Liberal and progressive veterans of the Great Recession will likely roll their eyes at this prognosis, thinking I’m some kind of simple-minded supply-sider. Yet my primary concern is about labor demand. Maintaining a formal relationship between employers and their employees, even if they’re furloughed, will be key to ensuring a robust economic rebound. If those relationships are broken, businesses won’t spontaneously raise wages. Rather, they will either close shop or restructure around business models where that labor isn’t demanded in the first place.

This is the genius behind the relief package’s Paycheck Protection Program. Starting on Friday, businesses with fewer than 500 employees, hotels, and restaurant chains will be eligible for federally guaranteed loans to cover their payroll, benefits, rent, and utilities for up to eight weeks. The loans are forgiven in full if employers retain their employees and don’t reduce their wages. To be sure, the program has administrative challenges of its own, but at least the logic is sound: Employees continue to get paid even if their place of work is closed, and Main Street businesses can stand by to reopen quickly when quarantines end.

Put differently, the Paycheck Protection Program pays businesses to maintain their labor demand, while Pandemic Unemployment Assistance pays workers to reduce their labor supply. How the two programs will interact is unclear. Unfortunately, even at $350 billion, estimates suggest the Paycheck Protection Program is deeply underfunded relative to the number of businesses at risk of failing in the months ahead. Without additional funding, mass unemployment and rolling business failures seem inevitable.

Some have argued that the goal of the relief package is to put the economy into a “medically induced coma.” Yet the reality looks more like the economic equivalent of mechanical ventilation: a necessary but blunt intervention to keep the economy breathing. Without strong incentives for reemployment and new-business formation in the next phase of emergency legislation, U.S. labor markets — like the lungs of a recovered COVID-19 patient — now risk suffering ominously permanent damage.


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