The Efficacy of Enhanced Unemployment Benefits during a Pandemic

The economic impact of efforts to slow the transmission of the coronavirus is now beginning to emerge.For a broader look at the potential economic impact of the coronavirus, see Bullard. On March 19, weekly new unemployment insurance (UI) claims spiked by 70,000. Investment bank Goldman Sachs predicts that on March 26, new claims will come in at 2.25 million people. A natural question is: How much income support will the federal and state governments provide to those who are eligible for unemployment benefits?

In this article, I discuss the UI system, the current UI benefit schedules of states that are part of the Eighth Federal Reserve District,Headquartered in St. Louis, the Eighth Federal Reserve District includes all of Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee. and ways one might adjust the current system in response to the economic effects of the COVID-19 virus and of the public health response to the virus.See Dupor’s March 17 blog for an overview of how one might approach the economic issues surrounding the current situation.

The Current UI System

UI benefits are often framed as “replacement rates,” i.e., the weekly benefit amount divided by the weekly (pre-unemployment) take-home pay. These rates vary across individuals and U.S. states as well as over time.They are subject to caps and other restrictions. The average replacement rate in the U.S. is about 45%.See U.S. Department of Labor.

Generally speaking, weekly benefits are calculated using an individual’s recent earnings history (from payroll records over the preceding year). Weekly benefits increase as an individual’s past earnings increase, but they are also capped at some level, which varies by state. For example, Indiana pays a weekly benefit equal to 47% of past earnings, up to a limit of $390 per week. In some states, a claimant’s marital status and number of dependents can influence benefit amounts.

By examining the specific dollar amounts, we can gauge the generosity of UI in several states under the current system. This could give policymakers a sense of whether UI generosity should be adjusted to reflect current economic conditions and, if so, how much to adjust it.

I used information from several state governments’ websites to compute benefits in two scenarios.Calculations are based on website formulas accessed on March 18, 2020. First, I considered a low-income case, someone who had been earning $600 per week before taxes,This would be the case if the individual earned $15 per hour and worked 40 hours per week. and a medium-income case, someone earning $1,000 per week.I assume the individual is unmarried and has no dependents in order to do the calculations. This assumption is made because a few of those states condition UI benefits on those criteria. In each case, I assume the person entering unemployment had been working continually over the preceding 12 months.

Table 1 reports the weekly UI benefits that would be received by a recently unemployed person as well as the lost income for a 12-week unemployment spell in each case.Note that Missouri's webpage states: "This calculator computes only an estimate based on the wage information you entered, and does not guarantee any benefit amount, or even if you will be eligible for unemployment benefits. Eligibility and benefit amounts depend on a number of factors, so if you do receive unemployment benefits, your weekly benefit amount may be greater or lesser than the amount the calculator shows." Every state's website had a similar qualification. Thus the values presented in this example are also subject to this qualification.

For example, the low-income worker in Arkansas would receive $300 per week in UI benefits under the current system. Thus, a 12-week period of unemployment would result in $3,600 in lost income for that person. Meanwhile, the medium-income Arkansan would receive $451 per week, implying lost income of $6,588 for the same period. Moreover, this individual’s higher pre-unemployment income limits the benefit to the maximum weekly amount set by the state.

In fact, in every state except Illinois, the medium-income person would receive the maximum benefit set by that state. In Mississippi, both low- and medium-income people would receive that state’s maximum UI benefit upon becoming unemployed.

Policymakers may view this level of income replacement as too low in the current economic environment. This is not unreasonable given that policymakers enhanced benefits during the last recession (2007-2009). As background, I next describe how UI was enhanced during that recession.

Enhancements to UI during the Last Recession

During the previous recession, the national unemployment rate and the total UI benefits paid peaked during the fourth quarter of 2009 and the first quarter of 2010, respectively. The unemployment rate reached 10% in October 2009. During the first quarter of 2010, $18.6 billion was paid in UI benefits, with an average weekly payment of $306. In contrast, during the last quarter of 2019, the corresponding values were $6.4 billion and $378 per week, respectively.

A number of changes were temporarily made to UI at the time. Through several federal actions spread out over months, the duration on UI benefits was extended from about 26 weeks to up to 99 weeks. The most significant UI actions during the episode were provisions in the American Recovery and Reinvestment Act of 2009 (i.e., the 2009 Recovery Act).

From the standpoint of recipients, there were three main changes.Some of the changes consisted of cost sharing between the federal and state governments, but were not relevant from the recipients’ perspective. See Vroman for a clear description of the UI aspects of the 2009 Recovery Act. The first was one of the extensions described above. Second, benefits were increased by $25 per week. Third, a UI claimant was provided access to a 65% subsidy for COBRA health insurance benefits. (Claimants paid the remaining share of the costs.)

COBRA is a federal health insurance law that was in force in the U.S. before the recession; the law allows for the continuation of employer-provided health insurance coverage for workers losing their jobs. Before the 2009 Recovery Act subsidy provision, claimants paid the entire cost of COBRA; this provision expired a few years later.

COBRA is not and, in 2009, was not inexpensive. Labor economist Wayne Vroman wrote, “Its average annual cost during 2008 [i.e., without the subsidy] was $4,704 for a single person and $12,680 for families.”

Combining the cost of UI changes and COBRA subsidies, the total unemployment-related spending from the Recovery Act was $65.1 billion.

Federal UI Changes in Response to the Pandemic

Thus far, changes to the UI system have largely been administrative. The Families First Coronavirus Response Act, signed into law March 18, introduced temporary changes to requirements on states in relation to unemployment compensation. These measures include waiving work search requirements and the one-week waiting period.See congress.gov/bill/116th-congress/house-bill/6201/text. Some states had already unilaterally taken actions to ease UI benefit access.

The Potential Effect of New Federal Proposals

The Coronavirus Aid, Relief and Economic Security (CARES) Act, Senate Bill 3548,See congress.gov/bill/116th-congress/senate-bill/3548/text. was introduced to the Senate on March 19. Initial estimates put the cost of the proposal at $1 trillion, but current negotiations in Congress have pushed that figure to $1.8 trillion, according to media reports Tuesday.

Many aspects of the CARES Act were outlined in a two-page plan by the Treasury Department, according to a document obtained by CNN on March 18. Analyses of the legislation and a reading of the Treasury plan both do not indicate major changes to the UI system. Nonetheless, the CARES Act could impact many workers at small firms experiencing interruptions due to the virus. The Treasury plan states that the proposed legislation would:

“[P]rovide continuity of employment through business interruptions … [and] authorize the creation of a small business interruption loan program and appropriate $300 billion for that program.”

According to the Treasury Department, employers with 500 employees or less would receive loans equal to "100 percent of 6 weeks of payroll, capped at $1540 per week per employee.” Borrowers would be required to maintain employment for all employees for eight weeks from the date the loan is issued.

It is noteworthy that much of the effects of this proposal could be accomplished through the payment of UI benefits directly to employees, combined with increased UI generosity with respect to both the replacement rates and caps. This could, in a temporary change, be renamed federally subsidized furlough benefits.St. Louis Fed President James Bullard has suggested calling this "pandemic insurance." See Bullard.

Paying furloughed employees directly through the existing UI system may be easier than channeling the dollars first from the Small Business Administration (SBA) to businesses and then from businesses to their employees.

Since each state already maintains the apparatus to evaluate UI claims and process payments to recipients, the UI system would likely work more efficiently than developing and implementing a small business interruption loan program.For example, the SBA had difficulties approving disaster loans in a timely fashion after Hurricane Sandy. See washingtonpost.com/business/on-small-business/disaster-loan-disaster-sba-much-too-slow-to-respond-to-hurricane-sandy-probe-finds/2014/10/26/5d6ce70c-5b1f-11e4-8264-deed989ae9a2_story.html.

In contrast, developing and implementing a new, large-scale small business loan-guarantee program may prove to be challenging operationally and proceed slowly. Economists are already aware of the “long and variable lags” in using countercyclical macroeconomic policies, at least since Milton Friedman’s seminal book in 1960. For example, it took seven weeks from the time the 2009 Recovery Act was introduced as a House bill until one component, the payroll tax reductions, began lifting most workers’ take-home pay.See Dupor’s March 18 blog post. Fourteen weeks elapsed between that bill’s introduction and when stimulus checks to Social Security recipients, another component of the Recovery Act, began being sent out.

The federal agency that would likely be charged with implementing the proposed loan-guarantee program is the SBA. The SBA’s most sizeable annual appropriations over at least the past 20 years were $2.4 billion in 2018. Setting up this new small business interruption loan program may take much longer than seven to 14 weeks, as was the case of seemingly simpler Recovery Act programs described above.

Besides the loan program, the CARES Act also contains two tax rebate programs aimed at individuals. Each is budgeted at $250 billion. According to the Chicago Tribune, the timing of the payments would consist of “a first set of checks issued starting April 6, with a second wave in mid-May.”See chicagotribune.com/coronavirus/ct-nw-coronavirus-congress-economic-response-bill-20200318-35z4ir3marbdxnig64v3qam4eu-story.html. Payment would depend on family size and income. Each payment would be up to $1,200 for a single person ($2,400 for married person filing jointly), with an additional $500 per each child they have.

This would provide additional income for UI recipients. For individuals who lose their jobs, perhaps because their employers did not qualify for the loan program, the direct payments may be insufficient to cover most of their lost income. Recall from Table 1 that a medium-income, unmarried Arkansan with no dependents and who makes $1,000 per week would lose $6,588 after netting out UI benefits under the current system. A $1,200 stimulus check would offset only about one-fifth of the lost income. According to the current proposal, this unemployed person might receive a second check in mid-May; however, more than 60% of this worker’s income would be forgone during the unemployment spell inclusive of both cash transfers.

UI Enhancements vs. Small Business Loans

At the current statutory replacement schedules, the cost of losing one’s job even for a few months could generate much hardship. Moreover, Americans in the range of incomes considered here often live paycheck-to-paycheck. In a tight labor market, a recently unemployed worker might be able to find a job relatively quickly. However, at a time when firms are laying off rather than hiring (as the U.S. economy seems to be moving toward), securing a new job may be very difficult.

The fall in income under these various scenarios would likely qualify at least some of these individuals for additional benefits, such as Medicaid or SNAP,It may be the case that the low-income individual would have had access to some of these entitlement programs even in absence of the job loss. which would alleviate some of the financial stress. However, this article focuses on the lost wages.

Suppose each state enacted a UI benefits policy in which the maximum cap were set at $1,450 per week (the analogous value in the Treasury proposal) and the replacement rate were set at 90%. Figure 1 plots the UI schedule under this enhanced, nationally uniform UI system and that of the current system in a particular state (in this case, Indiana).

Table 2 shows the lost income in the low- and medium-income scenarios under such a proposal. Because of the higher cap and replacement rate, there would be less lost earnings across the board. For the hypothetical low-income Arkansan, the lost income would fall from $3,600 to $720. For the medium-income Arkansan, the lost income would drop from $6,588 to $1,200.

The Price Tag

To compute the cost of such an enhanced UI program, one would need to assume three things: the duration of the program, the take-up rate (i.e., how many individuals would become unemployed) and the average weekly benefits (AWB) paid. Let us suppose that the program lasted six months and that the unemployment rate (or combined unemployment-furlough rate, if you like) was 15%.

Predicting the AWB paid is particularly challenging. Because of the nonlinearity in the replacement formula, the predicted AWB will depend upon where claimants lie on the pre-unemployment earnings distribution. If most people claiming UI are on the low end of the earnings distribution, AWB will be lower. I constructed a simple calculation using the earnings distribution in the fourth quarter of 2019 and hypothetical job-loss earnings distribution based on past employment-to-unemployment job separation probabilities. According to this calculation, the total cost would be $276 billion.The calculations are available from the author on request.

These numbers are meant only as a starting point. Economists at the U.S. Department of Labor and state departments of labor and many academic researchers have access to better data and models than I do. They would be able to put together better cost estimates than I can.

Health Insurance

Employer-provided health insurance is commonplace in the United States. Laid-off (or furloughed) workers, even if they receive higher UI replacement rates, would (or at least could) lose their insurance. COBRA already allows for continuation of coverage for workers losing their jobs. This law, however, requires worker-paid premiums. To reduce that cost, the federal government might temporarily cover 90% of the COBRA premiums for the unemployed or furloughed. Calculating an appropriate size of such a program, even in a rough sense, is difficult at this stage. For a baseline, suppose the allocation were $75 billion. (This figure is equal to three times the amount spent on COBRA subsidies in the 2009 Recovery Act.) In this case, the total cost of enhanced UI and COBRA support would be $351 billion.

Implementation

First, legislation would be needed to authorize the funding to cover the UI system and provide COBRA subsidies. The Department of Labor could offer, to each state government, to take over the full responsibility for funding that state’s UI program along with the agreement that the state follows the federal government’s new earnings replacement schedule. The agreement could be temporary, say four to six months.

Although state governments would continue to evaluate claims, issue checks and direct deposits, and do other related administrative work, the replacement rates would be set by and the full cost would be borne and deficit-financed by the federal government.

Since the federal government would assume the cost of the program, employers would not see an increase in their unemployment tax; moreover, the government might choose to place a moratorium on this tax for the duration of the program.

Some of the restrictions put on UI claimants would no longer be appropriate for a federally subsidized furlough program. These include a one-week waiting period and job search requirements. Some of these rules, such as the waiting period, have already been removed in at least some states, and other rules may need to be adjusted for the duration of the program.

Federally subsidized COBRA premiums have already been implemented once, as part of the 2009 American Recovery and Reinvestment Act. Past experience with this subsidy should help in getting it set up quickly.

Funding

One way to fund the above proposal to expand UI and COBRA benefits would be to simply add it as additional spending to other COVID-19 related fiscal actions. If, however, legislators did not want to add $351 billion to the total price tag on all COVID-19 legislation, they could carve $351 billion out of the existing proposal currently working its way through Congress.

The Senate bill is estimated to cost more than $1 trillion, according to media reports. It contains two cash transfer payments to households, each priced at $250 billion. One payment is set to occur in early April and the second is set to be paid in May, if macroeconomic conditions then warrant it.

Eliminating the second of these payments would free up monies to then pay for the majority of the proposal described in this article. An additional $101 billion could be allocated away from the small business interruption loan program proposal currently before Congress.

Reducing the small business loan program might be appropriate since much of the loan program’s funds are intended to cover affected small businesses’ payrolls. With the enhanced system described in this article, these workers could instead be moved to a federally subsidized furlough program, and therefore fewer funds would be needed for the loan program.

Two Remaining Issues: Incentives and Job Separations

One potential downside risk to this policy is that increasing the replacement rate might substantially increase the incentive for workers in unaffected or essential industries to become unemployed and thereafter remain unemployed.For academic work that supports the position that incentive costs of generous UI benefits are small, especially during recessions, see Birinci and See. High replacement rates and other generous unemployment benefits are sometimes cited as explanations for high perpetual rates of unemployment experienced in some European countries over the past several decades.See, for example, Ljungqvist and Sargent (2008). Limiting the duration of unemployment benefits, as is done currently in the United States, and returning replacement rates to their pre-crisis values after the economic impact of the virus pandemic has waned could be valuable in mitigating this downside.Limiting the duration of the high replacement rate policy to a specific number of months or using an unemployment/furlough rate trigger written directly into the enabling federal legislation are two ways to accomplish this.

Conclusion

At replacement rates more generous than the current levels, state unemployment benefits offer a fast, targeted means to help offset the income loss of laid-off and furloughed workers in industries disrupted by the actions to combat COVID-19. Moving workers from payrolls to the UI rolls would ease cash-flow concerns of struggling firms. On the downside, high replacement rates may reduce the chance that these individuals fill vacancies in essential industries. High replacement rates may be politically difficult to reduce once the COVID-19 crisis passes.

Government-guaranteed payroll loans to businesses designed to keep workers from being laid off similarly help affected workers in these industries. This approach would probably help maintain worker-firm relationships more than UI. On the downside, these loans introduce firms as “middlemen” in getting aid from the government to workers, a feature that is not present with UI. Thus, the payroll loan approach may be slower. As with higher UI replacement rates, payroll loans may keep people from filling job openings in essential industries.