There has been a great deal of interest in the possibility of a second round of stimulus checks: when, how much, and by whom? But the upcoming expiration of the federal $ 600 per week unemployment benefit program, a problem with much deeper economic implications, has been approaching as its July 31 expiration date approaches each day.
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The stakes are high. Up to 20 million unemployed Americans receive the federal unemployment benefit. Provides an additional $ 600 per week in addition to the state-paid unemployment benefit.
An abrupt end to the program, as it now seems certain if Congress does not act, will not only be a sudden financial shock for people and households that have become dependent on additional funds, but also for the entire economy.
What is the probability that the $ 600 federal unemployment program will continue? And what will happen if it doesn’t?
Why the federal unemployment supplement is so important
The federal unemployment benefit of $ 600 per week was included in the CARES Act (Section 2104), which was enacted by President Trump on March 27. However, the benefit was intended to be a temporary measure, covering employees only until July 31.
Temporary or not, the impact of the additional unemployment benefit cannot be overstated.
According to the Office of Economic Analysis (BEA), personal income in April surprisingly increased 10.5%. This was despite the dramatic increase in the unemployment rate, to 14.7% for the month, above the March rate of 4.4%. That represented an increase in the unemployment rate by more than 10 percentage points. April was the most damaging month on the job front since the coronavirus pandemic began.
Why the apparent contradiction? According to the BEA: “The increase in personal income in April primarily reflected an increase in government social benefits for individuals, as payments were made to individuals from federal economic recovery programs in response to the COVID pandemic -19 … “Those recovery programs were a combination of stimulus checks of $ 1,200 per person, and the start of federal unemployment benefits of $ 600 per week.
Personal income fell 4.2% in May, however, spending recovered 8.2%. The increase in spending was largely the result of the gradual reopening of the economy during the month. And despite the drop in personal income, there is little doubt that the increased spending was at least partially driven by improved federal unemployment benefits.
In other words, the economic impact of the coronavirus and the shutdown it caused would have been much more painful without federal unemployment benefits.
That begs the most important question: What happens when federal unemployment checks stop coming out?
The case against the extension of federal unemployment benefits
Despite the lack of action to extend federal unemployment benefits beyond the July 31 deadline, lawmakers are already taking sides. And while there are compelling arguments in favor of an even significant extension, there are concerns that the show has passed the mark.
One of the arguments against extending federal unemployment benefits is that they have been too generous. So much so that they may be acting as a disincentive for people to return to work.
The argument is not without merit.
According to a University of Chicago Becker Friedman Institute of Economics working paper completed in May, two-thirds of workers eligible for unemployment insurance may be receiving benefits that exceed their regular earnings. That includes the 20% who earn double their regular salary.
That’s not hard to imagine considering that, according to the Federal Reserve, an estimated 40% of those currently unemployed typically earn less than $ 40,000 a year. A state unemployment benefit of $ 200 per week, plus the federal benefit of $ 600, means that a worker who generally earns $ 400 per week could be collecting $ 800 of the combined unemployment benefits.
In response, Senator Rob Portman (R-Ohio) has proposed an incentive to return to work. It would provide $ 450 per week on top of a worker’s salary. However, the proposal only applies to those who return to work before July 31. No indication has been provided on how long the benefit will continue.
“I agree that people really want to go back to work,” Portman said in his presentation of the proposal to the Senate. “I think it’s wrong to say that people want to stay (unemployment insurance). I think people like to be at work. But when they can make a lot more money without being at work, it creates a disincentive. “
Portman’s proposal has been endorsed by the Trump Administration as a potential alternative to any extension of the federal unemployment benefit.
The case for extending the federal unemployment benefit
Whatever the reservations about the extension of federal unemployment benefits, one fact remains eerily clear: the coronavirus continues to advance throughout the country. In fact, new daily infections are now higher than at the previous peak in April. In recent days, new cases have exceeded 50,000.
That acceleration in the virus not only represents an obvious threat to health, but is also an ongoing drag on the economy.
In response, some states slowed or even reversed the reopening. Equally important, the increasing number of cases is also causing public reluctance to return to normal activity. The result has been a stubbornly high unemployment rate. Despite 4.8 million new jobs created in June, the month’s unemployment rate remained in double digits, standing at 11.1%. That is still more than three times the 3.5% rate in February.
Continuous improvement in employment can be difficult to achieve
With dizzying unemployment, a growing chorus of policymakers, experts, and advocates are using the words “reskill,” “upskill,” “retrain,” and more to fuel short-term job training as the way out of this recession. ” writes Forbes senior contributor Wesley Whistle. “But lack of skills is not the problem and more skills training is not the answer … this recession is like no other. People did not lose their jobs because they did not have the necessary skills, they were only victims of this pandemic.”
This is confirmed by projections that many of those who are currently unemployed will not return to the workforce any time soon.
“We estimate that 42% of recent pandemic-induced layoffs will result in permanent job loss,” said Professor Steven J. Davis of the University of Chicago Booth School of Business. “If the economic shutdown persists for many months, or if severe pandemics become a recurring phenomenon, there will be profound long-term consequences for the reallocation of jobs, workers and capital between companies and locations.”
All of which is a strong argument for some form of continuation of the federal unemployment program. After all, even though the impact of the coronavirus has been on the economy so far, it would have been much worse without the combination of federal unemployment and individual stimulus payments.
A 2016 working document issued by the Harvard Business School, The importance of unemployment insurance as an automatic stabilizer, estimates that the economic multiplier of unemployment insurance is 1.9. That means that for every $ 1 spent on unemployment insurance, $ 1.90 is generated in economic activity.
Current proposals to keep federal unemployment checks on track
In May, the Democrat-controlled House of Representatives passed the HEROES Act. He is currently in the Republican-controlled Senate, where he was initially labeled “dead on arrival.” But one of the provisions of the Act is to extend federal unemployment payments of $ 600 until January 31, 2021. That would provide a total of six months for the economy to recover from the economic consequences of COVID-19.
Another proposal, and a more likely one to obtain bipartisan support, is the Worker Aid and Safety Act. Proposed by Don Beyer (D-Virginia), it is a more complex proposal, offering tiered benefit provisions.
Although the proposal itself will expire on July 31, it provides for an extension that would be automatic if the President declared a new emergency pandemic at any later time. It also establishes tiered levels for each state, based on the prevailing unemployment rate. That can be from less than 5.5% for Tier I states, to more than 9.5% for Tier VI states.
Depending on the level in which your state is classified, you may receive federal unemployment benefits extended for between 13 and 65 weeks. Workers in states in the first three tiers will receive $ 350 in federal unemployment benefits, in addition to their regular state benefits, for 13 weeks. After that, they will continue to receive $ 200 a week during the national unemployment emergency.
Tier IV, V, and VI workers will receive $ 450 in federal unemployment benefits, in addition to their regular state benefits, for 13 weeks. After that, they will continue to receive $ 300 per week as long as their states remain at their respective levels.
The proposal has been accepted due to its flexibility to increase or decrease benefits depending on the severity of the pandemic and the level of unemployment.
Final thoughts
Although some form of extension of the federal unemployment program is discarded in certain quarters, it seems likely that some version will finally be approved. The Senate has been suspended until July 17, but will likely take the HEROES Act and federal unemployment soon after.
Opposition to extending federal unemployment benefits beyond July 31 may have been strong in May. But with the recent surge in coronavirus in much of the U.S., a stubbornly high unemployment rate, as well as the rapidly approaching national elections in November, it will be difficult for any member of Congress to oppose at least a reduced reduction version of the federal unemployment benefit program.
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