CARES Act — should congress continue benefits after July 31st?

The CARES Act provided supplemental unemployment insurance benefits of $600 a week to all workers who qualify for benefits. These benefits expire at the end of July. Should this supplement be extended?

The CARES act unemployment insurance should not be extended. Shutdowns to reduce the spread of COVID-19 caused businesses to layoff their workers by the thousands. Unemployment is a record high in March and April peaking at nearly 15%, leaving millions without income. In a stitch effort to ensure people have their basic needs met during these uncharted times, Congress passed the CARES act to supply unemployment benefits to people laid off directly because of COVID-19. Over 30 million people made claims to unemployment. In June, unemployment declined to 11.1%. However, the number of permanent job losers rose, as well as the number of long-term unemployed. 

The typical replacement rate of unemployment insurance is 40%. The CARES act was designed to replace 100% of lost earnings. However, a recent study found that for 68% of newly unemployed workers, $600/week exceeds their lost earnings, and the median replacement rate is 134%. The exceedingly high replacement rates are partly because COVID-related lay-offs fall disproportionately on low-income earners. Additional income encouraged consumption and ensured that families could keep their housing, eat, and pay for health treatment. However, the flat rate insurance may be too high, and disincentives people from looking for work. Unemployment benefits in the next phase should be calculated using the person’s previous earnings. and should be capped at 100% replacement. 

Senators who oppose the extension have suggested tax-cuts to employers and employees instead. This approach would ensure fewer people got laid off and do not rack up the national debt. Others suggest lowering the payment to $200-400 per week to avoid high unemployment benefits that will deter labor reallocation, especially for low-wage workers. Director of the National Economic Council Larry Kudlow proposed replacing the bill with benefits for new hires– so-called back-to-work benefits. 

As of June 2020, there are still an estimated 17.8 million people unemployed. Re-employment will be a slow process compounded by reduced demand for labor, and a high cost of job searching. For a V-shaped recovery, the unemployed need to be able to either return to their previous employer or quickly find a new job. Continuations of high unemployment benefits do not promote these types of recovery. However, research suggests that of those who have been laid off, 35% do not expect to return to their previous employer. 

However, jobs are expanding industries such as e-commerce and delivery services, we should encourage people to take these emerging jobs rather than wait to find out if their jobs will return while living off high unemployment benefits. The slowest to re-employ workers and the industries with the highest permanently laid-off rates include utilities, manufacturing, mining, and extraction, wholesale trade, and warehousing. According to projections by the National Bureau of Economic Research, these industries will also quickly reabsorb workers when the lockdown is lifted. Reducing barriers for companies in these industries to rehire in the form of tax-breaks or bonuses will ensure the fastest recovery. 

Shocks are industry-specific, and workers are predicted to remain unemployed at different rates depending on their industry. In the next wave of COVID-19 Relief, congress should focus on those workers who are permanently laid-off and should support businesses to hire or rehire temporarily laid-off workers. More targeted unemployment insurance coupled with back-to-work benefits may be the best way to stimulate the economy from both consumer and employer ends, while efficiently using resources.  

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