Unemployment Benefits: Congress Should Scale Back

People in cars wait in line to pick up unemployment forms in Hialeah, Fla., April 8, 2020. (Marco Bello/Reuters)

Congress should not extend expanded unemployment benefits in their current form when they expire at the end of July. The $600 federal plus-up to standard state-provided benefits is too generous, and if extended would hurt the overall economy and the employment outcomes of workers.

With the federal supplement, unemployed workers received average benefits of $921 per week in May. On an annual basis, this is close to $50,000 per year. As I discuss in my latest Bloomberg column, two-thirds of workers have higher incomes on unemployment than they had from working. Benefits are twice as large as previous earning for one in five unemployed workers.

But Congress also shouldn’t let expanded unemployment benefits abruptly expire. Doing so would reduce aggregate income by around $50 billion per month, which itself could cause a recession-level contraction in economic activity. The pandemic is flaring up in the South and West, with several states closing bars and taking other steps to slow the spread. And the U.S. will continue to have recession-level unemployment for well over another year.

What to do? From my column:

A nice middle ground was charted recently by Jason Furman and Timothy Geithner, both senior members of the Barack Obama administration, along with George W. Bush administration economist Glenn Hubbard and University of Maryland economist Melissa S. Kearney. They argue that the amount of the supplemental payment should be determined by economic conditions in each worker’s state.

In states with the highest unemployment, the federal government would provide a maximum payment of $400 per week, on top of what the worker receives in his or her normal state benefit. As the unemployment rate falls, this extra benefit shrinks. At 7% unemployment, the supplement is eliminated.

Crucially, the group defines the federal supplement as a rate calculated against previous wages, and not as a flat dollar amount. This guarantees that workers won’t have higher incomes from unemployment benefits than they did from working.

Not all states have computer systems that are able to implement a system based on a rate rather than a flat amount. For those states, the group recommends a maximum federal supplement of $200 per week.

I wouldn’t take their plan entirely as it is. For example, $400 per week is too generous, even as a maximum benefit. But the structure of their plan points a good way forward for Congress. In addition:

Along with these changes, Congress could help states update their unemployment insurance computer systems. States should not have to resort to providing flat-dollar benefit supplements because their IT infrastructure can’t handle anything more complicated.

Check out my column for my full argument. Your comments, as always, are very welcome.

Michael R. Strain — Michael R. Strain is the director of economic-policy studies and the Arthur F. Burns Scholar in Political Economy at the American Enterprise Institute.

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