Despite recent signs of growth, more than 17 million Americans remain unemployed, and how to compensate them has become a contentious political issue.
Unemployment Insurance has provided financial relief for these individuals, particularly since, per the CARES Act, those benefits have included an additional $600 per week payment under the Federal Pandemic Unemployment Compensation program (FPUC). That payment, however, expires on July 31. Congress will need to extend it — with some important modifications.
State unemployment benefits replace only a small percentage of a worker’s income — around 45%, on average. With the widespread furloughs and layoffs caused by COVID, Congress and the White House realized that wouldn’t be enough. At the same time, it was evident that many states would have a hard time calculating a federal UI top-up tailored to replace no more than 100% of an individual’s prior earnings. Hence, Congress opted for the flat number of $600 in the CARES Act.
At the time, speed was of the essence. But it has since become evident that $600 a week was far too high. A recent study found that two-thirds of beneficiaries are receiving more on unemployment than they earned while working, and one-fifth are getting at least double. The result is that employers across the country have had difficulty getting furloughed employees to come back to work, and that businesses that need new hires — and there are many of them — have found it difficult to fill jobs. In fact, according to the Federal Reserve’s recent Beige Book, in 9 of 12 districts businesses were having a hard time hiring workers in recent weeks because of this payment. This is bad for employers, bad for the economy, and bad for workers, since the longer someone spends out of a job, the harder it ultimately is for them to find a new one.
And yet, zeroing out FPUC payments doesn’t make sense either. We still have a pandemic, and workers who are sick or have been exposed shouldn’t go rushing back to the workplace simply because 45% of income replacement is insufficient to make ends meet. In addition, some of the jobs that have been lost won’t be coming back, and workers will need more time than in a typical downturn to retrain and seek new lines of employment.
The ideal answer would be to customize a combined state/federal UI payment so that no one’s benefit would be higher than their earnings prior to becoming unemployed. However, not all states have upgraded their UI systems to allow them to administer such a formula. So, Congress will need to propose an easier way to get to a similar result. Fortunately, a bipartisan group of economists from previous administrations has come up with a solution.
First, for states that have upgraded their systems, Congress should provide a variable federal UI supplement that will result in a replacement rate of 80% to 90% of an individual’s prior covered wages up to a maximum top-up of $400 per week. The 80% to 90% threshold reflects the fact that payroll taxes are not collected on unemployment insurance.
Second, for states that are unable to handle this formula, Congress should provide a flat amount equal to half of the maximum benefit (i.e. $200 per week) for up to three months, which will allow time for them to upgrade their systems.
Third, the federal payment should be scaled back based on declines in a state’s unemployment rate with the full benefit available if the unemployment rate is above 15%, and the benefit ending when that rate falls below 7%.
There will certainly be challenges in transitioning to this system. But if the alternative is a choice between maintaining $600 a week for six months or more, or cutting FPUC to zero, it shouldn’t be a difficult decision. Unemployment insurance has played an important role in boosting incomes and our economy during an incredibly challenging time. With some important modifications to FPUC, it can continue to do so.
Neil Bradley is Executive Vice President and Chief Policy Officer at the U.S. Chamber of Commerce. He spent two decades working directly with congressional committee chairpersons and other high-ranking policymakers.