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It Doesn’t Have to Be All or Nothing: How Unemployment Insurance Could Support Work and Continue to Provide Financial Relief

At the end of July, the additional $600 in weekly unemployment benefits enacted by the CARES Act is set to expire. With roughly 31.5 million people currently collecting those benefits, the approaching deadline is forcing lawmakers to decide how unemployment insurance should continue to provide financial relief and support economic recovery.

The $600 in supplemental weekly benefits has clearly provided crucial financial relief during this severe economic downturn. As local officials begin to relax stay-at-home orders, however, evidence is increasing that the additional $600 in weekly benefits serves as a disincentive for some people to return to work and inhibits an economic rebound as business activity picks back up.

Going forward, lawmakers should begin to gradually phase down this supplemental weekly benefit so UI continues to provide immediate financial relief in the near term, while also encouraging work and supporting economic recovery. To ensure that such a phasedown does not cause undue hardship, particularly as the virus surges again in some parts of the country, the government should also distribute a second round of Economic Impact Payments (sometimes referred to as “recovery rebates”).

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Why the Supplemental Weekly Benefit Discourages Work

The COVID-19 pandemic and stay-at-home orders implemented to contain it have resulted in unprecedented workforce disruption and tens of millions of layoffs, many of which will be permanent. To financially stabilize dislocated workers, lawmakers enacted an across-the-board increase of $600 in weekly unemployment benefits, which previously only replaced somewhere between one-third and half of prior earnings.

Because all weekly unemployment benefits increased by $600, regardless of previous earnings, two-thirds of eligible unemployed workers can now collect more on UI than from their prior salary, and 20% can collect twice as much. Moreover, the Congressional Budget Office estimates that should the $600 weekly benefit supplement be extended until January 2021—as proposed in the House-passed HEROES Act—five out of every six recipients would receive more in unemployment benefits than from returning to work.

While many people will not yet have the option of going back to work this summer or may be discouraged from doing so for health and other reasons, some will confront the decision and may be disincentivized from returning if the additional $600 in weekly benefits remains in place as an alternative. CBO anticipates that extending the supplemental benefit through January 2021 would result in lower employment over the next two years. CBO also estimates that despite a bump in short-term economic output by raising consumption among dislocated workers, keeping the full $600 supplement in place would ultimately lower economic output in 2021 by discouraging recipients to return to work.

Proposal: Temporarily Phase Down the Supplemental Weekly Benefit and Issue Another Round of Recovery Rebates

Reduce the Supplemental Weekly Benefit to $400 and Revisit in September

Rather than allowing the additional $600 to expire in full at the end of July or extending the same supplemental benefit through the end of the year or beyond, lawmakers should reduce the additional weekly benefit to $400 for August and September. Dislocated workers clearly need to continue to receive additional financial relief during those months, but the number of recipients for whom UI benefits exceed previous earnings from work should decrease. This change would encourage more recipients to return to work as the economy recovers.

Enacting this benefit change for only two months will retain flexibility to revisit and adjust UI levels as health and economic conditions change in these highly uncertain times. If the public health and economic outlooks improve this summer and states continue to successfully lift stay-at-home orders, Congress should continue phasing down the supplemental benefit after September, with the goal of phasing it out completely around the end of 2020. The recent uptick in nationwide COVID-19 cases, however, has led at least 21 states to pause their reopening plans or implement new restrictions. If conditions deteriorate and states reinstate stay-at-home orders, lawmakers should consider holding the supplemental weekly benefit at $400 after September so that displaced workers receive additional financial relief at a time when the COVID-19 pandemic and the policy response to it would continue to curtail most job opportunities. Either way, Congress will need to address appropriations for fiscal year 2021 before the end of September to avoid another government shutdown, which will provide the opportunity to revisit this issue.

Importantly, this change should be relatively straightforward for states to administer. Throughout the COVID-19 pandemic, the UI system has been plagued by outdated state administrative systems that are unable to process the historic influx in claims or implement anything beyond simple changes to unemployment benefits. A singular, across-the-board phase down, however, should be relatively simple to implement because all supplemental benefits would decrease for the next two months, regardless of when a recipient claimed unemployment and their previous earnings.

Provide Additional Financial Support with a Second Round of Recovery Rebates

While phasing down supplemental unemployment benefits to encourage work, lawmakers should direct the Treasury Department to issue another round of recovery rebates—refundable tax credits—to provide greater financial relief to families. Millions of households are still struggling financially. For example, the number of people who report sometimes or often not having enough to eat has risen by nearly 4.4 million since the COVID-19 pandemic began, according to the Census Pulse Survey. Additionally, in a BPC survey from May, more than one-third of all likely voter households with incomes under $100,000 reported experiencing either “some” or “great” financial hardship as a result of the pandemic.

The same BPC poll also found that the economic fallout from COVID-19 is not being borne equitably across the country. Specifically, while only 27% of white households said they had experienced “some” or “great” financial hardship, the same was true for 40% of Black households and 47% of Hispanic households.

Although many of those who are struggling collect unemployment benefits, the UI system cannot address all the economic disruption. First, not all dislocated workers have applied for benefits, often citing the complexity associated with doing so. Still others are waiting to receive their benefits, as outmoded state administrative systems continue to work through backlogs. Finally, many are suffering from financial shocks that UI does not cover, such as lost secondary jobs or cancelled raises. Lawmakers should distribute another round of Economic Impact Payments to cushion finances for all low- and middle-income households.

Issuing another round of recovery rebates along with maintaining some of the supplemental weekly UI benefit would come with a steep price tag—probably somewhere in the $400 to $500 billion range in the next two months. Given the trend of the pandemic and the apparent stalling of the economic recovery in recent weeks, however, this additional support is necessary to avoid further long-lasting damage to household finances.

Conclusion

How lawmakers adjust UI going forward is among the most important decisions they must tackle this summer. We recommend gradually phasing down the supplemental weekly benefit—retaining flexibility to course correct should conditions change—while issuing another round of direct payments to American families. Although these policies are costly, and cannot continue indefinitely, this approach will begin to wean the country off an unsustainable benefit, ensure that households continue to receive the current support they need, and begin to rebalance the incentives between staying home and returning to work.1

End Notes:

1 CBO estimates a higher fraction of those who would collect more from UI than work because it anticipates that those who have been laid off or furloughed would, on average, earn less than their previous salary if they obtain a new job.

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