By Brian Blase, Casey Mulligan, and Doug Badger
As the recent two jobs reports show, the economy is much stronger than many thought it would be back in the spring. Over the past two months, the number of net new jobs is up by about 8 million. Yet, more than 18 million workers were collecting unemployment insurance benefits in late June, about 16 million more than during February.
This month, Congress is expecting to pass additional coronavirus-relief legislation. It’s vital that it get the incentives right to encourage work and smart business reopening.
Previous coronavirus bills have put conflicting policies in place. Congress sought to encourage workers to remain attached to the workplace through the Paycheck Protection Program, which allowed businesses to borrow money to continue to pay their workers and meet expenses.
However, Congress also enacted a $600 weekly unemployment insurance bonus that lifted the average weekly benefit to nearly $1,000, making it harder for many businesses to get employees to return to work even with additional precautions put in place to minimize the virus spread.
Five out of every six recipients are receiving unemployment benefits that exceeded their previous earnings, according to the Congressional Budget Office. This significantly depresses employment and makes it more difficult for businesses to reopen.
The add-on payment expires on July 31. It should not be extended. Doing so would encourage workers to remain unemployed longer than they otherwise would and depress the economic recovery. We estimate that if the add-on is continued, more than 60 percent of those unemployed after July 31 would be out of work specifically because of the add-on.
Congress should create additional incentives for people to return to work, in part because longer-term spells of unemployment can harm a worker’s lifetime earnings, as skills atrophy.
If political considerations lead to extension of the unemployment bonus, the amount should be as small as possible for the shortest possible period. Other prominent economists, including Jason Furman, Timothy Geithner, Glenn Hubbard and Melissa Kearney, have called for the unemployment benefit to be phased down.
Importantly, recipients should be allowed to keep any additional add-on payment if they go back to work. This bonus would be available to only those who were unemployed prior to June 30 so as not to create incentives for another round of layoffs.
Congress also should avoid other actions that would discourage returning to work. For example, in May, the House of Representatives passed legislation that fully subsidizes unemployed workers’ continued participation in their employers’ health plans through COBRA. Such a subsidy would make unemployment less costly for workers and would thus lead to higher jobless rates and longer spells of unemployment. Such subsidies also lock the recipient into a single use for the government aid, which means they aren’t able to use it in the way that helps them the most.
The decline in employer health coverage has been a small fraction of what was projected, so a subsidy for continuation of employer health coverage also doesn’t appear to be needed, given other pressing priorities. Based on a survey from the Commonwealth Fund, nearly 98 percent of people who had employer health coverage in February still have employer health coverage. And of people who lost their jobs and had health coverage at work, people have maintained employer coverage by a 3:1 margin rather than enrolling in ObamaCare or Medicaid or becoming uninsured.
Congress and the administration face enormous challenges in pursuing policies aimed at mitigating the economic effects of the pandemic. America needs businesses to smartly reopen and workers to return to their jobs. Policymakers must structure assistance in ways that minimize impediments to recovery. Phasing out the federal unemployment add-on benefit and making it available to those who return to work is the best course for supporting economic recovery.