The extra $600 in unemployment insurance has been effective

The CARES Act, the $2 trillion-plus package to provide economic relief and recovery from the coronavirus shock in early April was, for many reasons, deeply imperfect. But the modifications the CARES Act made to the nation’s unemployment insurance (UI) system are an utterly crucial lifeline for tens of millions of American workers. Besides temporarily expanding the eligibility criteria for who qualifies for unemployment benefits through the end of the year and providing an additional 13 weeks of state UI benefits, the CARES Act also provided an extra $600 per week in UI payments through the end of July.

This $600 top-up has been fiercely criticized by some since the Act passed—e.g., Senator Lindsey Graham (R-S.C.) stated that it would be extended past July only “over our dead bodies”—but the criticism is either ill-informed or in bad faith. The extra $600 has been by far the most effective part our economic policy response to the coronavirus shock. It is likely improving—not degrading—labor market efficiency, and we should build on this and make the nation’s unemployment insurance system well-resourced and far more generous even in normal times.

The history of how a flat $600 in additional UI benefits was agreed upon by policymakers is straightforward, if depressing. In normal times, these benefits are stingy, typically replacing between one-third and one-half of a typical worker’s weekly wage. For decades, too many economists and policymakers have labored under a number of wrong preconceptions about the labor market, and one of the most damaging was that decent jobs were plentiful and easy to get, and the only thing keeping potential workers out of these jobs for any stretch of time was workers’ own motivation, which could be sapped if benefits were too generous. It was the old and dumb idea that the U.S. social safety net—despite being by far the stingiest in the advanced world—had become a too-comfortable “hammock.” (For what it’s worth, the evidence from the aftermath of the Great Recession reveals that extended UI benefits had little or no effect on whether a worker found a job—meaning it wasn’t UI benefits that were keeping workers out of work—it was a lack of demand for workers.)

The economic shock of the coronavirus was an event so obviously unrelated to the motivations of individual workers that policymakers were willing to substantially (if temporarily) increase the generosity of unemployment benefits. Our preference would have been for a 100% replacement rate up to a quite generous maximum benefit. But decades of disinvestment in the administrative capacity of state UI offices left them incapable of flexibly calculating each new applicant’s benefit amount with a 100% replacement rate. (Case in point: most offices are still using the 1970s-era programming language COBOL to run their computers). State offices are capable of administering a flat-rate increase, however. So, policymakers in Congress came up with a smart and compassionate second-best solution of picking a flat-rate boost to benefits that would leave the average worker (and most workers overall) with 100% of their pre-crisis earnings.

But the necessity of the one-size-fits-all approach means that workers who earned less than the average worker before the crisis will receive benefits that are somewhat higher than 100% of their previous wage. Many conservatives claim this is somehow an economic disaster. They’re wrong—it’s actually great.

For the purpose of generating a rapid macroeconomic recovery from this shock, the more money getting into the pockets of low- and moderate-wage workers, the better. Without generous relief, these workers and their families would have had to run down meager savings and go into debt just to survive during the lockdown period. Besides causing avoidable human misery, this would severely hamper spending—and, by extension, the overall economic recovery—when the public health all-clear is eventually sounded.

The primary complaint waged against the extra $600 is that it will impede the otherwise efficient functioning of low-wage labor markets. Forgive our eye roll. The labor market has been rigged against low- and moderate-wage workers for decades, and pre-crisis earnings for these workers were far too low, on both moral and efficiency grounds. Plus, the economic argument against high UI replacement rates was that we’d sap workers’ motivation to pound the pavement searching for jobs. But we’re in the midst of legally enforced physical distancing to fight an epidemic—the less pavement-pounding the better. Further, the economy may have lost more than 30 million jobs in the last month. Even without the epidemic, it would be stupid and cruel to use cutbacks to UI benefits that make them too stingy to live on as a cudgel to demand people somehow find a job quickly in an absolute nightmare of a job market.

Conservatives have floated stories of businesses trying to reopen now that can’t find workers because potential employees “make more collecting unemployment.” Well, if businesses are really serious about reopening (and many shouldn’t be), there’s an easy cure for this—offer wages that are high enough to entice potential workers to come to work. Policymakers could aid this effort and level out incentives in a couple of ways. First, they could let laid-off workers keep their extra $600 weekly payment (or at least some increment of it) even after they find a new job. Also, they could offer a universal wage credit (phased out above the median wage, say) that boosts workers’ pay so long as the higher UI benefits persist. If the problem conservatives have with this $600 really is just the economics of incentives and not simply annoyance that lower-wage workers are finally getting some money in their pockets, this is an easy way to address it.

It is hardly a shock that many potential workers are leery about venturing into the public to work these days. In an efficient labor market—where the playing field is level between workers and employers—the wage offers needed to get people to overcome their wariness and go to work in the face of coronavirus fears should be increasing. But U.S. labor markets are not efficient or balanced even in the best of times, and in the coronavirus-affected labor market with businesses shuttering right and left, it seems far from clear that competition between employers would push up wages for workers. In a sense, the extra $600 is helping labor markets reach a more reasonable equilibrium where workers are actually compensated appropriately if they are willing to shoulder the risk and excess burden of showing up to a job in the midst of an epidemic.

And this is something we can afford and constitutes exactly the sort of thing public debt should be spent on. Money spent on continuing crucial unemployment insurance provisions will help avoid a prolonged period of high unemployment that will do far more serious and persistent damage to the economy. In the last six weeks, close to 30 million workers have applied for unemployment insurance. It’s worth noting as a point of comparison that those 30 million workers would need to be provided an extra $1,400 per week for a year to match the fiscal size of the 2017 tax cuts aimed at corporations and the rich.

Do we wish the U.S. social insurance system—and particularly the unemployment insurance system—was much better-resourced and able to respond to the current shock with something more nuanced than an across-the-board $600 increase in weekly benefits? We do. But you go into a generational economic crisis with the social insurance system you have, not the one you wish you had. Given the constraints, the extra $600 is smart and compassionate and policymakers should extend all (or at least most) of this extra boost well past July—at least until unemployment is falling rapidly and at a manageable level.

And we sure hope those bemoaning the smart and compassionate second-best response to an eroded UI system will join the rest of us in building up the system’s capacity and generosity after the current crisis ends.

from Hacker News https://ift.tt/2SBBmYR