Unemployment insurance ‘fix’ will make the COVID-19 recession worse

More than 16 million Americans have lost their jobs so far due to the COVID-19 pandemic, based on new claims for unemployment insurance, known as UI. Known to be one of the best indicators of recession, jobless claims are reported every Thursday morning and are vastly higher than they have ever been. This isn’t because of COVID-19; it’s because of Congress.

The UI system is a case study in perverse incentives in the best of times, but the four-month “fix” in the Coronavirus Aid, Relief, and Economic Security Act (CARES) makes it far worse. Sen. Chuck Schumer (D-N.Y.) describes it as UI “on steroids.” Although many aspects of the CARES Act are worthy, even vital, the “Pandemic Unemployment Assistance” will be a steroid boost to unemployment, not incomes.

Existing UI provides a government payment to each worker who is involuntarily laid off, in essence paying people not to work. The amount varies slightly according to state-based formulas. But UI checks are generally set to replace 50 percent of the individual’s wages until they find a new job. When the Obama administration extended UI in response to the 2009 recession, it was lengthened from 26 weeks to 99 weeks, but the replacement rate of 50 percent was considered sacrosanct. And since the program was established in 1935, it has always excluded people who quit their jobs.

Pandemic UI jacks up the replacement rate with a supplemental $600 per unemployed worker for the next four months. That’s roughly an extra $2,400 each month that will go to you only if you are unemployed.

Consider a single mom who works checkout at a local grocer for $15 an hour, earning a weekly paycheck of $600 per week for an annual gross income of $31,200. Under the new UI, she will be paid the replacement rate of $300 plus the extra $600 each week. Her UI “salary” now equals $46,800 per year. Why keep working?

Now that the CARES Act is the law of the land, any American with an annual salary of $62,000 has no financial incentive to work, certainly not until August. Three out of four workers in the United States make less than this amount, so it’s no exaggeration to recognize that Congress just turned work incentives upside down.  

But UI only applies to workers who have been laid off, right? Not anymore. CARES expanded UI qualifications to 11 new categories, including if “the individual has to quit his or her job as a direct result of COVID–19.” Realistically, the only thing a worker must do tomorrow to qualify is to claim credible fear that they might catch COVID-19 on the job.

For the first time in history, the federal government is going to pay non-working Americans way more than working Americans. As a result, nurses, grocers and janitors — all suckers. Pandemic UI is a slap in the face to these Americans putting themselves at risk by working through the outbreak.  

Let’s harness this moment of clarity for a smarter reform. First, payroll taxes should be dynamically responsive — lowering automatically (to zero) during recessionary periods then rising during booms. For nearly a century, the “automatic stabilizers” that counterbalance the business cycle have operated via federal spending. Now’s the time to have automatic stabilizers on the tax side.

Second, UI payments to unemployed workers should automatically phase out over time, rather than continue at the same level until the six-month cliff. 

Third, consider a temporary, state-federal wage-matching program that is a higher rate the sooner an individual gets a new job. For example, pay a $200 weekly supplement if they start working within 30 days, $100 within 60 days, and $50 within 90 days. There’s a novel idea: Reward work.

A Great Rebound is coming — as soon as state governments ease the shutdown and Congress repeals its anti-employment handiwork. Pandemic UI is going to cause more economic damage than the pandemic itself.

Tim Kane is the JP Conte Fellow in Immigration Studies at the Hoover Institution at Stanford University. He is a veteran Air Force intelligence officer. His most recent book is “Total Volunteer Force: Lessons from the U.S. Military on Leadership Culture and Talent Management” (2017).