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UI expansion to cushion blow from layoffs

  • The significant increase in unemployment insurance payments included in the recent fiscal package means that many claimants could end up being paid close to what they previously earned. This suggests that the unprecedented wave of layoffs in recent weeks may not prove as damaging as it first seems.
  • The fiscal measures announced in the US have not gone as far as some European countries in attempting to safeguard jobs. While more European countries have introduced wage subsidy schemes modelled on the success of Germany’s Kurzarbeit program, the $2trn CARES Act only included a modest $350bn in loans for small business, forgivable if they maintain payrolls, which were only available from last Friday. Although the latter now looks set to be expanded, it failed to prevent millions of job losses in recent weeks.
  • Nonetheless, the recent fiscal package did provide significant direct support for workers which, alongside the $1,200 cheques sent out to most taxpayers, included a major expansion of Federal unemployment insurance (UI). Eligibility has been broadened to include the self-employed, part-time and gig workers, the maximum benefit period has been extended by 13 weeks, or 50% in most states, and, most significantly, a fixed $600 supplement will be added to all weekly payments for the next four months.
  • As a result, the average weekly payment for some new UI claimants could be higher than their previous earnings. With the average payment standing at $370 in 2019, the new Federal supplement should bring the total payment to nearly $1000 – higher than average weekly pay for private sector workers and more than double the typical earnings of those in the hardest-hit leisure & hospitality sector. (See Chart 1.) Admittedly, the reality is more complicated as states calculate benefit amounts as a share of previous earnings, so the lowest paid workers also receive the smallest benefit payments. The average weekly earnings data also may not fully capture tips earned by hospitality workers or other benefits. But the new $600 Federal payment alone still exceeds average earnings in leisure & hospitality by almost 50%.
  • This may in turn be part of the reason why jobless claims have soared so rapidly in recent weeks. Workers may be more accepting of temporary furloughs if they stand to lose little income, and several major retailers have cited the new provisions when announcing layoffs. The upshot is that while the unemployment rate has probably already surpassed its post-GFC peak and could rise even higher over the coming months, the damage in terms of lost income may end up being less severe. (See Chart 2.)
  • Admittedly, the US system is far from perfect. There are widespread reports of UI claims being delayed or wrongly rejected due to dilapidated state IT systems. Some workers whose hours have been cut may still earn too much to qualify for UI and will therefore lose out, with the work-sharing schemes available in some states (which the CARES act commits to funding) less developed than those in Europe. Most importantly, by encouraging layoffs, the UI expansion could make it harder to maintain the relationship between furloughed workers and their employers, hampering the eventual recovery. The latter could become a particular problem once the initial four months of $600 weekly payments ends. Overall, however, the speed and strength of the economic recovery will depend most on how quickly containment measures can be safely lifted, which in turn may hinge on how quickly testing can be ramped up.

Chart 1: Average Weekly Earnings by Industry ($)

Chart 2: Unemployment Rate (%)

chart001-135.pngchart002-104.png

Sources: Refinitiv, DoL, Capital Economics


Andrew Hunter, Senior US Economist, andrew.hunter@capitaleconomics.com