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Don't end expanded unemployment insurance: Improve it

Don't end expanded unemployment insurance: Improve it
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We stand at the precipice of another Great Depression. In a matter of weeks, 41 million workers have lost their jobs, and the unemployment rate may soon surpass its peak in the Great Depression. To help address this crisis, The Coronavirus Aid, Relief, and Economic Security (CARES) Act temporarily raised unemployment insurance benefits by $600 per week, in what is the largest expansion of benefits in U.S. history. This supplement is set to expire at the end of July, and there is debate about what comes next.

The flat $600 payment was chosen to get funds out quickly at the start of the COVID-19 crisis. But it is not well-suited to the longer-term economic crisis we now face. The size of this crisis means it is imperative to extend expanded unemployment benefits past July, but we should do it in a way that will not deter our eventual recovery.  

Our empirical research provides insight into more effective ways of designing an extension. The flat $600 payment is a blunt, “one size fits all” tool that is not tailored to specific workers and places. Yet the current debate has fallen along predictable partisan lines. Democrats want to extend the flat benefit through January 2021, arguing that unemployment benefits can help keep the economy afloat. Republicans oppose an extension, arguing that the $600 benefit will deter recovery by discouraging workers from taking jobs.   

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Although some partisan battles may reflect irreconcilable differences in values, this should not be one of them. Our research leads us to propose a small legislative change that can help ensure that crucial benefits continue to flow to those most in need, while reducing the concern that people will not take jobs when they become available.

Many Democrats argue that enhanced unemployment benefits will support the economic recovery.  Rigorous research supports this argument. Unemployment benefits help families through difficult financial circumstances. In prior research, we used data from millions of anonymized bank account records to study the spending of unemployment recipients. Unemployment benefits prevent substantial hardship and suffering. When unemployment benefits run out, spending falls sharply. This includes drops in spending on necessities like groceries, pharmacies and doctors’ visits. 

Furthermore, we find that a large share of unemployment benefits are spent immediately, which helps the businesses where unemployment recipients shop. Research also shows that unemployment benefits help people make their mortgage payments. No one wins when they cannot. Foreclosure is devastating for the family losing its home, is bad for local communities and is costly for lenders. If waves of households simultaneously default, it can even shake the financial system as a whole. Expanded unemployment benefits can help prevent a repeat of the financial calamity experienced in the Great Recession.

Some analysts believe that a flat $600 benefit is problematic because it affects incentives for essential work. Consider existing essential workers, such as janitors at the local hospital. They are still working and face elevated risk from going to work. Yet an unemployed school janitor can be receiving 58 percent more in unemployment benefits than the hospital janitor. In new research, we find that such situations are common right now. Roughly two-thirds of unemployed workers are eligible for benefits that exceed their lost wages. A flat $600 per-week benefit may also impede staffing for new essential jobs. For example, demand for grocery delivery has skyrocketed, and demand for home health aides will rise if the elderly avoid nursing homes.

Finally, a flat $600 benefit does not vary with economic conditions. Some states have reopened many businesses while others still have substantial restrictions, and we do not know where disease clusters in the future may warrant future shutdowns. It makes sense to pay benefits that fully replace lost wages when most businesses are closed and there are no job openings, but not during normal times.

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Instead of a flat payment, we propose a federal supplement on top of state unemployment benefits that would replace a fraction of each worker’s wages. The exact fraction would be set by the political process, but indexing benefits to lost wages is crucial. As an example, setting this fraction at 45 percent would yield close to full wage replacement for most workers, while also keeping benefits below lost wages. At this level, an unemployed worker who was previously earning $1,000 a week would get a federal supplement of $450 per week. Combined with typical state-level benefits, this would bring each worker’s income close to what they were earning in their prior job. This fraction should vary with local economic conditions. For example, it could be set at a lower level, like 20 percent, in states with lower unemployment rates.

This tailored policy is better targeted than the current flat $600 payment, while still protecting lost income for most workers and remaining feasible to implement. States already record a worker’s past earnings when calculating their standard state benefits. Determining a worker’s separate federal payment only requires multiplying this single number by the relevant federal supplement. However, this still requires some additional work by state agencies, which are already struggling to pay benefits in a timely manner. These agencies should receive additional federal funds to implement the necessary IT, and flat payments should continue in the interim as a stopgap measure. 

We are lucky that, unlike at the start of the Great Depression, we have an unemployment insurance system already in place. Let’s use it to build a bridge from where we stand today to the future when the COVID-19 pandemic has subsided.

Peter Ganong is an assistant professor of economics at the Harris School of Public Policy at the University of Chicago; Pascal Noel is an assistant professor of finance at the Booth School of Business at the University of Chicago; Joseph Vavra is an associate professor of economics at the Booth School of Business at the University of Chicago.