The United States is not known for its generosity to the unemployed. But the coronavirus crisis has transformed our system for compensating jobless workers. As tens of millions of workers suddenly became unemployed, Congress passed an expansive relief package with an unprecedented $600-per-week supplement for jobless workers. The goal was to replace their wages so they could survive the economic lockdown.
As a result, though, many people may now be eligible for substantially more money while unemployed than they made while they were working. A new analysis by Peter Ganong, Pascal Noel and Joseph Vavra, economists at the University of Chicago,1 uses government data from 2019 to estimate that 68 percent of unemployed workers who can receive benefits are eligible for payments that are greater than their lost earnings. They also found that the estimated median replacement rate — the share of a worker’s original weekly salary that is being replaced by unemployment benefits — is 134 percent, or more than one-third above their original wage. A substantial minority of those workers, particularly in low-wage professions like food service and janitorial work, may end up receiving more than 150 percent of their previous weekly salary.2
The research underscores one of the central — and most politically explosive — tensions of our economic crisis: What’s the best way for our battered unemployment insurance system to keep jobless workers afloat during a historic downturn with no end in sight?
The idea behind a $600 payment was simple: In 2019, the national average unemployment payment was $370 per week and the national average salary for unemployment recipients was $970 per week.3 The additional $600 per week is meant to make up the difference, providing enough money on a weekly basis to fully replace the average unemployment recipient’s salary. Other analyses of estimated average wages and unemployment benefits have already shown, though, that replacement rates likely vary quite a bit by state.
But looking at average wages doesn’t tell the whole story, because the country’s significant income inequality means that more workers fall into lower-wage categories. To address that problem, the new analysis simulates benefits for the median — rather than the mean — unemployment-eligible worker, drawing on Census Bureau labor supply data.4
This data comes with a few important caveats. One is that because government data lags, the sample of workers the researchers drew on for the analysis does not reflect the much larger pool of people who are unemployed right now. If anything, Ganong told me, that means the researchers’ estimates may understate how many unemployed workers will be eligible to receive more than their original salary during the current crisis, since the effects of the economic shutdown have disproportionately hit lower-income workers.5 Plus, the fact that workers are eligible for unemployment insurance doesn’t mean they have the benefits yet. Delays in applying for and receiving unemployment payments have been widely reported across the country, and some workers are still struggling to get through their state’s system.
The analysis illustrates how something that seems like a simple proposition — replacing jobless workers’ salaries while a public health threat persists — is not something our unemployment insurance system was built to do quickly or easily. Most of the experts I spoke with agreed that back in March, when the unemployment insurance expansion passed, a flat payment was the most feasible solution. Unemployment benefits are always inconsistent across states, though, since each state sets its own rates. And now, those inequalities are even more pronounced. The median unemployment-eligible worker in Massachusetts is eligible for an estimated 125 percent of her former salary, compared to 166 percent in Mississippi.
The researchers uncovered other kinds of inequality, too. In some professions, like janitorial work, people who are employed by essential businesses are continuing to show up to their jobs under hazardous conditions. But in doing so, they may be eligible for less money than janitors who have been laid off or furloughed by a nonessential business. In an ideal world, Ganong said, the people who have kept working at hospitals or grocery stores would be receiving some kind of hazard pay. “But that’s generally not the reality, which means there’s a weakness in the current system,” he said. “We’re giving more money to certain workers to stay home than to other workers who are putting themselves at risk by going to work.”
Several economists and unemployment insurance experts reviewed a draft of the analysis at FiveThirtyEight’s request. Many were surprised by the number of workers estimated to be eligible for unemployment benefits that exceeded their original wages. “I think we all knew that some workers were going to be getting more than their original earnings,” said Michael Strain, the director of economic policy studies at the right-leaning American Enterprise Institute. “I would not have guessed that it was quite this many workers, but I certainly think that it’s a completely plausible figure.”
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The question is whether this will be a problem as the economy starts to reopen. In addition to the inequality inherent in possibly replacing some workers’ wages at a higher rate, it might not make financial sense for workers to search for other jobs or even return to their original jobs if they’re making substantially more money by staying home. Some experts don’t see that as a bad thing — in fact, to some, providing an extra incentive to stay home during a pandemic might be a feature, not a bug. “My bigger worry is that workers will feel pressured to go back to an unsafe job,” said Michele Evermore, a senior policy analyst at the left-leaning National Employment Law Project. But it could also make it more difficult for businesses to convince their workers to return — at least, at the salaries they were being paid before.
A fight is already brewing on Capitol Hill about whether the $600-per-week payment should be continued after it expires at the end of July. House Democrats have argued that it’s working well, and proposed a straightforward renewal of the existing payment as part of a bigger relief package. Republicans, meanwhile, are pushing for a cap on benefits or a bonus for workers who return to work. Another option, Ganong and his coauthors point out, is for the federal government to provide workers with a percentage of their lost wages that, combined with state unemployment insurance payments, would come close to replacing their original salary.
But that would require a more complex calculation by state unemployment insurance agencies — one they might be unwilling or unable to implement. “In a perfect world, I would prefer to give people a percentage of their income,”said Heidi Shierholz, a senior economist at the left-leaning Economic Policy Institute. “But we might not be set up to do it.” Many state unemployment insurance agencies are still using decades-old computer systems, for example, presenting potential technical challenges if Congress asked them to change the benefits formula. And Daniel Zeitlin, the director of policy at Washington state’s unemployment office, said that while he didn’t think it was impossible, any change would be difficult for a system already under tremendous stress.
Another route is to simply reduce the fixed bonus payment when the $600-per-week benefit expires, or — as some Democratic politicians have proposed — phase out the benefit as social distancing requirements are eased and the unemployment rate starts to go down. Ramping down to a payment as small as $100 or $200 each week would still be generous by historical standards, according to Gabriel Chodorow-Reich, an economist at Harvard University. And it would continue to provide some kind of buffer for workers who have trouble finding jobs.
Simply reducing the payment could end up exaggerating the lopsidedness rather than fixing it, though. According to the University of Chicago team’s analysis, halving the payment to $300 per week would still mean that 42 percent of unemployed workers would be getting more than their original wages — and some people would be receiving a smaller fraction of their previous salary. A $300 weekly payment would leave one-quarter of unemployed workers with replacement rates below 60 percent. “Lots of people who earn more than the average or median wage are still living paycheck to paycheck,” Shierholz said. With a lower replacement rate, some of those people might start to struggle to pay for necessities like rent or groceries.
So if Congress opts to extend the expanded unemployment insurance program past the end of July, politicians will have to decide how much an unevenly distributed benefit really matters, particularly as public health concerns continue to loom. And the fate of the next phase of relief to jobless workers may hinge in part on what state unemployment insurance agencies can actually do. “It looks like health concerns are going to prevent a fast recovery, so it makes sense to keep a substantial boost to replacement rates,” Chodorow-Reich said. “In an ideal world, the next round of funds will probably be more tailored to workers’ individual circumstances. The question is whether our totally antiquated systems will be capable of pulling that off.”