Episode 8: Rethinking the Jobless Benefits Boost

TESS VIGELAND: The Coronavirus Aid Relief and Economic Security or CARES Act added a $600 weekly supplement to unemployment benefits nationwide. It was intended to help the now more than 40 million newly unemployed Americans who lost their jobs because of the pandemic. But that extra $600 has faced wide criticism for its unintended consequences.

EDUARDO PORTER: How should we think about this program and its impact on the economy?

TESS VIGELAND: This is Pandemic Economics, a podcast about the global impact of COVID-19 from Stitcher and the Becker Friedman Institute for Economics. I’m Tess Vigeland.

EDUARDO PORTER: And I’m Eduardo Porter. We’ve been invited to have this series of conversations with University of Chicago economists.

TESS VIGELAND: In this episode, I talked with Peter Ganong of the Harris School of Policy and Joseph Vavra of the Booth School of Business. Their research with co-author, Pascal Noel, also of the Booth School of Business, explores the unemployment system and its effects on the economy. And they have a proposal for improving the next round of COVID-related benefits.

So when we hear about unemployment insurance, it’s not a monolith. It’s different from state to state. Peter, can you just give us a kind of a very basic explanation of how unemployment benefits work and maybe some of the major differences in what you receive based on where you live?

PETER GANONG: Sure, so the basic idea is that when you’re employed you pay in some taxes, and then if you are unemployed through no fault of your own– so you’re laid off from a job rather than fired– and you are actively searching for work, you can gain some unemployment insurance, which in the US is usually between 30% and 50% of your prior earnings. So if you were earning $1,000 at your job when you were unemployed and you were unemployed in February 2020 before the crisis hit, you’d get an unemployment insurance benefit of between $300 and $500 per week.

TESS VIGELAND: And that’s something that goes through your state unemployment agency, right?

PETER GANONG: That’s correct. In general, the states with the least generous UI benefits tend to be states in the south like Mississippi, Florida, Tennessee, Arkansas. Florida is particularly notorious, because they capped benefits at an amount of under $300 per week nominally. So for the last 10 plus years, there’s been inflation and the cost of living has risen, but UI benefits have not risen in Florida for a very, very long time.

At the other end of the distribution, some of the states that have the most generous UI benefits are places like Oregon, Hawaii, Vermont, and Oklahoma.

TESS VIGELAND: Well Joe, is it possible to give us a picture of who was receiving unemployment insurance, unemployment benefits prior to this crisis?

JOSEPH VAVRA: Yeah, so the way that the unemployment insurance system was set up in the past is everybody will receive the same replacement of their wages. So it’s a proportional system, where if you have a 50% benefit in your state and you were paid $500 a week before, you could be eligible for a $250 benefit. So there’s not going to be much variation across different people in the fraction of wages that are going to be replaced through unemployment insurance.

With one important caveat– and that’s that typically, benefits are capped at some maximum level. So people who are making higher wages, they’re going to hit these benefits caps and receive smaller unemployment benefits as a fraction of their wages. But for the rest of the population, the replacement rate is going to be basically the same for everyone.

TESS VIGELAND: OK, so let’s fast forward– well, actually, I guess we’re looking back– to the passage of the CARES Act. And this is the $2 trillion that Congress allocated for business loans and grants to help them stay afloat that one time cash payment that went to most households. And then it also allocated a $600 a week bump to these state unemployment benefits. Joe, how does this work? How did all of this happen? And how long is it supposed to last?

PETER GANONG: Whatever amount of unemployment benefits you were getting before, you’re now going to get this additional $600 that’s just tacked on top of that every week. Whether you were working at a low wage job or a high wage job– everybody is going to get the same $600. So the CARES Act expanded unemployment benefits through July 31 and after that, absent any new legislative action, we’re just going to go back to the system that we were before.

TESS VIGELAND: So Peter, let’s dive into some of the implications of this $600 benefit and get your thoughts on it as an economist. I remember hearing very early on, even during the congressional negotiations, that this could end up being more money than people were making in the jobs that they were laid off from. Tell us what you found in terms of how true that has been.

PETER GANONG: So let’s go to Nevada as just one example. So suppose that you were earning $600 a week in your jobs– that would be $15 an hour, 40 hours a week. You would have gotten $312 in UI benefits. But instead, because of the $600 benefit bump, you get $912 a week. And so you end up getting about 50% more from UI benefits than you were getting at your previous job.

TESS VIGELAND: Wow.

PETER GANONG: That situation, it turns out, is actually true in all 50 states and is true for most unemployed workers in the US right now. So we calculate that 2/3 of workers currently have benefits that are greater than their prior earnings. And in addition, for one in five workers, they’re actually getting twice as much in than their prior earnings.

TESS VIGELAND: So Peter, there’s a clear upside for those workers. They’re getting more money than they made while they were working. Anything else come out of that move that was good for the economy?

PETER GANONG: Yes, so I think you’re exactly right to identify that workers benefit, because they’re able to afford all of their necessities and possibly even some luxuries. There are also two other types of benefits for the economy as a whole above and beyond the benefits to the workers themselves. First, there are gains to the businesses where benefit recipients shop. They spend more money at those stores. Those stores, which we know have had massive declines in revenue overall, so benefits are in some sense, keeping the retail sector on life support.

And then there’s a second type of gain from this policy that is less obvious, but I think equally important, which is thinking about how unemployment benefits enable people to afford their debt payments. So for example, there’s some previous research, which shows that expanded benefits are particularly important at preventing mortgage defaults.

Mortgage defaults are bad for everyone. They’re bad for the family that has to move out of their house. They’re bad for the lender that then takes a big loss on the loan. And they’re destabilizing for entire communities, as we learned in a really massive way in the context of the great recession when you had whole neighborhoods that were filled with foreclosures. So both for the benefit to sort of local businesses and to the benefit to neighborhoods are two of the less obvious, but really important reasons that you’d want to have a strong unemployment benefit system.

TESS VIGELAND: All right, then Joe, let’s turn to you. If you are paying people more in unemployment benefits than what they were making in their jobs, the argument is, does that then disincentive them to go back to work if and when they are able to do so?

JOSEPH VAVRA: I think it’s not quite as simple as just saying that when businesses want to rehire those workers, that the workers are going to refuse to come back, because if somebody is currently unemployed and their job comes back available, and they refuse to take that, job they’ll no longer be eligible for unemployment benefits except in a few limited circumstances. So I think the concern is not so much on that direct dimension, but I think there are concerns which you can think about kind of on the frame of how do we think about reallocating jobs in the economy between businesses that are going to no longer be there in the future and the new types of essential jobs that might be growing.

So restaurants are currently operating only on a takeout model at very diminished capacity, so there’s much less demand for restaurant employment. At the same time, demand for delivery services has skyrocketed. So if you’re thinking about one consequence of paying very high unemployment benefits is that you may limit this type of reallocation. So people aren’t going to be as likely to take those expanding jobs and take whatever the new essential jobs are in the economy if we’re paying these very high unemployment benefits.

PETER GANONG: Tess, this is Peter. I’m going to jump in with one more example, building on what Joe said to talk about why this may be important for the economy. So nursing homes have now become very, very dangerous places to live in the US. And people are not going to want to move into nursing homes if they can avoid it. However, elderly people need a lot of help. So demand for home health aides, as an example, is likely to rise, and we need more people working in those jobs in order to keep as many people as possible safe in America right now. And it’s the type of job that you might not take if your unemployment benefits are higher than the going rate to work as a home health aide.

TESS VIGELAND: So does it make me a socialist if I argue that maybe we should just pay home health care workers more?

PETER GANONG: So no, one reason we should want elevated unemployment benefits during this time period to some extent is because that will have the effect of raising wages in professions like the home health profession that I just described. So I think it would be good to push up wages there. However, if you end up in a place where you’re asking for $25 an hour to work as a home health aide, that’s probably well above what the market can bear.

JOSEPH VAVRA: This is Joe again. I think there’s a major kind of fairness issue that comes about from paying unemployment benefits that exceed workers’ past wages. And that’s if you think about essential workers who are still being required to go into work often facing increased health risk in negative conditions on that front– they still have to go into work.

There’s no guarantee that they’re being paid anymore to do so. We don’t have any mandates for hazard pay. At the same time, other people who had been laid off, at least right now, are eligible for these expanded unemployment benefits and might be earning even more sitting at home not working than these essential workers are going into work.

EDUARDO PORTER: These are big things. Unemployment insurance for 40 million people is unemployment insurance for, like, one fourth of the entire US workforce. It’s not small. It’s huge. I think this is tinkering with really big things and then it, of course, has implications for other big things like consumer spending and economic activity. And who goes back to work and when. So this is massive. But it clearly brings up issues of fairness.

TESS VIGELAND: It does. And Joe and Peter’s paper actually had a really vivid example of that, which is you take say, two janitors in the same city. They’re probably making the same amount of money. One is working for a hospital one is working for, let’s say, an elementary school. Well, the elementary school gets shut down, so that janitor goes and applies for this extra $600 a week, putting him over what he was making prior to the pandemic.

Meanwhile, a hospital janitor is working probably very long hours at this point. He or she is not getting the extra $600. And in fact, is probably not even getting hazard pay.

EDUARDO PORTER: And to add to the irony, those two janitors might be actually working for the same company, because there’s, like, three janitorial companies in the entire United States, you know? Peter and Joe actually had some meetings with policy makers and they have a proposal with some interesting ideas about how to fix this.

TESS VIGELAND: Yep. I’ll talk to them about that proposal and what they’d like to see happen when the CARES Act expires. Stick around for more Pandemic Economics.

One of the big questions is, what happens if the benefits expire and there’s nothing to replace them?

JOSEPH VAVRA: So people who were right now under the CARES Act being paid more than their lost earnings are now going to face massive benefits cuts. And then what will the consequences of that be? Well, it’s undoing all the benefits of high unemployment insurance. It’s going to make it harder for these unemployed workers to afford necessities.

TESS VIGELAND: Pay the mortgage.

JOSEPH VAVRA: Yeah. It’s going to make it harder to pay the mortgage, to pay rent, we’re going to see more defaults, which could potentially have dire consequences for the broader financial system.

TESS VIGELAND: Presumably, there is some sort of middle ground between that dire situation and what we’re experiencing now with the $600 payment. So let’s turn to how you as economists perhaps would design a new extra COVID related unemployment benefit assuming that this flat sum goes away. Peter, let me turn to you first. What would be the first step or recommendation from you?

PETER GANONG: Our recommendation is that beginning in August when the CARES Act extra benefits expire, that we continue to pay extra benefits, but do so in a way that is more tailored to workers prior wages. Let me just sketch one hypothetical as an example. Suppose that the federal government decided that it wanted to replace 45% of lost wages above and beyond what the states are replacing. So for most workers, that would bring the total unemployment benefit when you take the state and the federal component together to be approximately equal to the prior reach of the worker.

TESS VIGELAND: So can we go back to the Nevada example and can you kind of game out for us what that would look like?

PETER GANONG: So we talked earlier in this interview about a worker in Nevada who was earning $600 a week and she was getting $300 in unemployment benefits before the crisis. The crisis brought her up to $900 in unemployment benefits, so about 50% more than she was earning. If the Feds instead were to organize an unemployment supplement on the basis of prior earnings, she would get $582 a week. So that’s close to her prior earnings, but not above the level of her prior earnings.

TESS VIGELAND: So Joe, then how does that work with states that have a lesser amount of unemployment insurance to begin with?

JOSEPH VAVRA: The specific policy that we were suggesting was flat proportional supplement that would be the same for all of the different states. So what that would mean concretely– Nevada has higher baseline benefits generosity than Florida does– the policy that we’re proposing would, for example, add 45% supplement to Nevada’s baseline. It would add the same 45% supplement to Florida’s baseline.

TESS VIGELAND: OK, so then people in Florida are definitely getting less, but it’s because of what the state’s situation was pre-crisis?

JOSEPH VAVRA: Yes. You could implement an alternative policy where the benefit is larger in states that had initially smaller unemployment benefits. That would get you closer to achieving full wage replacement for every unemployed worker in the country. But the consequence of that would be that the federal government would be basically transferring more resources and subsidizing more of the states, which were previously stingier and their unemployment benefits. And there’s pros and cons of that.

TESS VIGELAND: And if we assume that part of the reason that the CARES Act had this flat payment was because it was just easier to implement quickly, what about the ease of a plan like this?

JOSEPH VAVRA: So essentially, all the states would need to do to calculate this federal supplement is figure out what is that individual workers previous earnings. They already need to figure out that number for calculating their own benefits, because the individual state benefits formulas depend on that. So just keep track of that number that you’ve already collected as part of applying state benefits. And then we just need to multiply those earnings by whatever the proportional benefits under the federal system is.

So if we go with a 45% supplement, we just keep track of previous earnings, and we multiply that by 45%, and already the system is such that we’re sending out two different payments. There’s a state payment and a federal payment. And it would be the same under this supplemental policy. We would just calculate that supplemental payment in a slightly different way.

TESS VIGELAND: And is it possible to then say how that would affect the economy writ large? Again, if part of the benefit for the $600, the extra $600, is that people are then going out and spending it in their neighborhoods, on their mortgages, so they don’t default, then what about the economy under this proportional plan?

JOSEPH VAVRA: I think as long as we’re providing you know relatively high unemployment benefits, high replacement rates of 80%, 90%, 100%. People should be able to make their mortgage payments. They should be able to afford necessities, at least to the extent that they could when they were employed. But in terms of just preventing the negative consequences of high unemployment, I think getting people close to their lost wages, getting them close to full replacement already basically addresses those concerns. We don’t need to be providing people more income than they were making when they were employed in order to prevent defaults from happening.

TESS VIGELAND: Peter?

PETER GANONG: The CARES Act is set to be the same benefit bump regardless of where you live. And the reason why that’s perhaps not appropriate for the next phase of the recovery is that in the next phase of the recovery, we’re going to have some places where the pandemic is raging and we all need to stay home– like, for example, Chicago, where I live. And other places where the pandemic is not nearly as severe and it’s time to get back to work.

So just to give you some examples in the April unemployment numbers. Michigan had an unemployment rate of 23%. That’s a place where we want people to stay home for the foreseeable future. Minnesota, not so far away, had an unemployment rate of 8%. So still way up from before but far, far less severe than Michigan.

And so you would ideally like to tailor the federal benefit bump to how the local labor market is doing. When the local labor market is in terrible shape, as it is in Michigan, that’s a place where we want to keep benefits very high to encourage people to stay home, and implicitly as we discussed before, this will have a side benefit of pushing up wages for essential workers where it’s dangerous. Sort of as a backdoor way to get hazard pay, you may think of it as.

And then alternatively, in places like north Florida or Minnesota, those places are ready to get back to work. And so the case for elevated unemployment benefits is less strong there, and so it would still make sense to have a federal supplement there, but perhaps not quite as high as the federal supplement that we need right now in places like Michigan and Illinois.

TESS VIGELAND: That would seem to necessitate a lot of management though, wouldn’t it?

PETER GANONG: That’s a great question, Tess. So we talked before about how state unemployment insurance systems already keep track of your prior wage. So state unemployment insurance systems also keep track of the unemployment rate in their state. And so one of the federal state partnership programs, which was very important in the last recession, is called EB for extended benefits. And extended benefits vary how long your unemployment benefits can last as a function of the state’s unemployment rate.

And so what we’re suggesting is simply we already tie the duration of benefits to the state’s unemployment rate and as state agencies are already keeping close track of their unemployment rate exactly because of this question of how much extended benefits to offer. And so our suggestion is in addition to keeping track of it for how long benefits are offered to also keep track of it and setting the level of benefits.

EDUARDO PORTER: The thing is that the US has pretty much always been the most stingy rich country in terms of unemployment insurance and a range of other social insurance policies. But in particular, in the US, unemployment insurance replaces a really, really small share of income. I think Peter and Joe were saying 30% to 50%. Well, in most of the other rich countries you’re talking about, 60, 70, you know, sometimes going up to 90% of the income that you had when you were working. So when we’re hit with like big economic crises like this one, you need Congress to get together and try to patch together some extraordinary program on top of unemployment insurance, and that always ends up in a political brawl.

So in the next episode, we’re going to talk to Raghu Rajan, who was the former head of the Central Bank of India.

TESS VIGELAND: What do you want to talk to him about?

EDUARDO PORTER: So I’d really love to hear him talk about how he sees the global economy for reacting to COVID-19. Central banks in the rich countries are putting a lot of money into their economies to try to react to this crisis, which is hitting pretty much every economy around the globe.

TESS VIGELAND: It seems to me like with interest rates near zero and central banks already just pumping money into the economy, are they going to run out of arrows in their quiver?

EDUARDO PORTER: Pandemic Economics is produced by the University of Chicago’s Becker Friedman Institute for Economics. Our producers are Devin Robins and Dana Bialek. Our Executive Producer is Ellen Horne. Production and original music by Story Mechanics. Pandemic Economics is part of the University of Chicago Podcast Network. I’m Eduardo Porter.

TESS VIGELAND: And I’m Tess Vigeland. Thanks for listening.