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A Better Unemployment Insurance Program for a Re-Opened Economy

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A Better Unemployment Insurance Program for a Re-Opened Economy

June 9, 2020

As COVID-19 was causing the nation’s economy to suddenly shut down in March, Congress moved swiftly to provide financial assistance to millions who were abruptly thrown out of work. These entitlement payments temporarily played an important role in helping Americans get through a public health emergency, but if extended in their current form would threaten the ability of businesses to hire and get back on their feet. A more nuanced approach – allowing individuals to immediately receive benefits from Social Security in return for deferring retirement – would ensure that people who genuinely need substantial assistance can opt to receive it, without causing others to drop out of the workforce unnecessarily.

Among the many provisions included in the March 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act was the establishment of Federal Pandemic Unemployment Compensation – a new $600 per week benefit for individuals who had lost their jobs as a result of the pandemic. This provision is set to expire at the end of July, and Congress has begun deliberating about what form assistance take in the future.

A University of Chicago study recently estimated that, as a result of this provision being combined with pre-existing unemployment insurance benefits, the median newly unemployed person was entitled to an average of 134% of his or her regular income. In the throes of the first wave of the pandemic, this helped encourage Americans to stay home. But, as a return to normal business becomes increasingly possible, Congress should ensure that any future assistance goes to those who truly need it, rather than needlessly pulling people out of jobs who are able to work. 

As 21 million Americans remain unemployed and entire industries are still entirely shut down, Congress will surely seek to extend some form of assistance beyond July. But businesses seeking to resume operation have reported finding it hard to get staff to return to work. This is in large part because the CARES Act entitles more than two-thirds of eligible workers to unemployment benefits that exceed their prior earnings, while a fifth can receive benefits that are more than twice what they previously earned. This calculus is further skewed by the fact that individuals also stand to save substantial amounts on daycare and commuting costs, as well as time, if they choose not to return to work. 

Such an arrangement sets up a conflict between businesses and their staffs, who stand to lose eligibility for benefits if their employers call them back to work as they are permitted to reopen. As a result, a return to work would cause them to incur increased expenses and greater health risks in return for lower incomes. 

The Congressional Budget Office has noted that while the work disincentive could be reduced by cutting assistance to a limited percentage of individuals’ prior income, as jobs will still be hard to come by following reopening, this would hurt those with the lowest incomes and may hamper their contribution to macroeconomic demand. A better approach would be to target assistance at those who genuinely can’t work.

Andrew Biggs of the American Enterprise Institute and Joshua Rauh of Stanford University have proposed that the federal government make direct payments to individuals in return for them agreeing to delay the age at which they are eligible for Social Security. They estimate that in order to receive several thousand dollars, most Americans would only need to delay retirement by a few months. Not only would this help individuals make up for lost income and serve to boost economic demand in the short run, it would also have the advantage of not adding to national debt liabilities over the long run. 

Mitigating the adverse long-term fiscal effects may help defuse Republican opposition to extending assistance, but the greatest merit of the proposal lies in overcoming the problem of asymmetric information with respect to individuals’ genuine ability to safely work. Up until now, this has been done paternalistically – with state authorities categorizing various activities as safe or unsafe, essential or nonessential – and, on this basis, individuals have become eligible for unemployment assistance or effectively required to work. 

By linking receipt of up-front benefits to the costs of delayed Social Security eligibility, the Biggs-Rauh proposal would effectively leave the choice of whether people can safely return to work up to individuals by eliciting a credible signal of their willingness to do so. This would allow for a broader array of intangible and idiosyncratic considerations relating to the availability of daycare, the ability to rely on spousal income for household needs, and the risks associated with individuals’ commutes. Such an arrangement would also make it possible for essential workers in dangerous jobs to receive assistance and consequently strengthen their ability to negotiate appropriate hazard pay.

Sylvain Catherine, Max Miller, and Natasha Sarin of the University of Pennsylvania have demonstrated that as little as a 1 percent reduction in individuals’ future social security incomes could fund an increase in benefits more generous than the CARES Act bonus. This implicit endorsement of a Biggs-Rauh-like proposal landed Sarin, who is an advisor to the presumptive Democratic presidential nominee Joe Biden, in political hot water.  But it should not have because by mitigating the moral hazard of unnecessarily leading people out of the labor market, the proposal would allow more generous benefits to be provided with fewer associated strings, conditions, and negative side effects. It could also be provided federally – circumventing dysfunctions resulting from the administration of state unemployment insurance.

During the first wave of the coronavirus, eligibility for financial assistance has been determined by regulatory policies set by public health officials who declared business activities either open or closed. Yet, as the nation gradually reopens and while we still face the threat of localized waves and variations in risk, it is desirable to have a more nuanced method of determining eligibility that allows individuals to judge for themselves whether they need assistance. Congress should therefore embrace the Biggs-Rauh proposal as a replacement for the current system of allocating Federal Pandemic Unemployment Compensation when it lapses at the end of July.

Chris Pope is a senior fellow at the Manhattan Institute. Follow him on Twitter here.

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