April 29, 2020
Unemployment Benefits and Returning to Work
- The Coronavirus Aid, Relief, and Economic Security (CARES) Act increased the unemployment benefit amount so much that the maximum unemployment benefit is greater than the median wage in the majority of states.
- While the expanded unemployment benefit is only in effect until July 31st, it could pose an incentive problem for those states that are planning to reopen parts of their economy before then and need to bring back workers.
- An upper-bound estimate of 92.8 million workers typically make below the maximum weekly unemployment benefit; nearly 3 million workers in 10 states could seek to return to work in the next week.
- Georgia has issued an emergency rule that allows workers who make $300 a week or less to continue receiving unemployment benefits. This rule would affect less than 10 percent of the state labor force but enables low–wage employees to return to work without seeing a drastic drop in their earnings.
Due to stay–at–home orders and social–distancing guidelines, many businesses have had to close or cut hours and jobs, leading to a substantial increase in unemployment claims—over 26.4 million.i Massive layoffs have required an expanded unemployment system, not only to support laid–off workers, but also to incentivize workers to stay home to reduce the spread of the virus. With the federal government boosting unemployment benefits by $600 a week until the end of July, many workers are now receiving more on unemployment than they would if they had continued working.
As coronavirus cases continue to rise nationally, President Trump has stated that social–distancing guidelines may be extended into the summer, but he is leaving decisions regarding stay–at–home orders up to states.ii There has been considerable debate within and among different states about when individuals can return to work, with some states extending stay–at–home orders while others prepare to reopen certain segments of their economies. Any state considering reengaging their labor force before the end of expanded unemployment on July 31st faces challenges surrounding worker incentives to return.
Returning to work
On April 24th, Georgia and Alaska became the first states to begin easing stay–at–home guidelines.iii Seven other states have announced plans for partial reopening by May 1st. Stay–at–home orders are set to expire in an additional seven states on April 30th.iv Those states may choose to extend restrictions and stay–at–home orders or begin the first phase of reopening.
The states that are planning to reopen are listed below with their respective initial unemployment claims from the first week of March to April 11th.v Over 3 million workers could seek to rejoin the workforce in the next week.
Initial UI claims since March
With over 26.4 million jobless claims since mid-March, it is important that individuals have the proper incentives and support to join the workforce when the time comes. Before states begin officially reopening, it is crucial that state leaders and employers be aware of the potential roadblocks to reopening the economy —namely that in most states, many individuals are making more on unemployment than they would if they were employed.
The CARES Act allocated $1 billion for the expansion of unemployment benefits. Typically available for 26 weeks, the CARES Act provides for 39 weeks and an additional $600 a week on top of base payment through July 31st. Eligibility has also been extended to alternative workers and other individuals who typically do not receive benefits.
While it is important for individuals to have the ability to stay home and be financially stable doing so, having unemployment benefits be significantly higher than wages creates a serious incentive challenge in getting people back to work when the time comes. The unemployment system is one that differs drastically depending on the state, with the average wage–replacement rate being around 50 percent.
Comparing the maximum unemployment benefit and each state’s median wage can provide an idea of how many workers could be affected by incentives to remain on expanded unemployment if states begin reopening their economies before the provision sunsets on July 31st.
At the maximum benefit amount, unemployment benefits are greater than median wage in all states except the District of Columbia. Minnesota has the largest difference between median wage and benefits. In that state, the maximum unemployment benefit provides $491 more a week than the median wage.
Using 2019 wage and unemployment data, an upper–bound estimate of 92.8 million workers (or 63 percent of the workforce) typically make below the maximum weekly unemployment benefits under the CARES Act.
State–level changes to unemployment
In order to address some of the challenges to reopening posed by an expanded unemployment system, Georgia’s Governor Brian Kemp and the state’s Department of Labor have put in place an emergency rule. According to the new rule, workers returning to work can earn up to $300 a week and continue to retain their state unemployment benefits, including the $600 bump.vi Anything above the $300 a week will be deducted from the unemployment benefits. Structuring reopening in a way that allows individuals to gradually reattach to the labor force, while not immediately cutting off benefits, will make individuals more likely to seek employment during the time that expanded unemployment benefits are in effect. A worker making $300 a week collecting even a dollar of unemployment benefits would also be eligible for the weekly Federal Pandemic Unemployment Compensation ($600), bringing total weekly earnings to over $900 a week. By continuing to provide some benefit to reengaged workers, part-time work incentives can reasonably compete with the $965 maximum benefit provided under the CARES Act. At the most, workers could make $1,265 a week ($300 in wages with the max benefit of $965 seen in Table 1).vii This emergency rule will cover mostly low–wage earners working part-time. According to 2019 wage data, less than 10 percent of Georgia’s workforce (or fewer than 447,000 workers) would likely qualify to continue receiving benefits.viii There is no way of knowing exactly how employers will behave given the current situation, however; employers may choose to hire back many of their formerly full–time workers on a part-time basis, allowing more individuals to make use of the state’s emergency rule. Other states may emulate Georgia’s gradual approach to returning to work, especially those states that have a larger gap between weekly wage and weekly unemployment benefits.
With several states looking to ease stay–at–home guidelines, it is important to understand how new legislation could affect individuals’ choices about returning to work or remaining on expanded benefits. With over 14 states potentially reopening in some form over the next two weeks, making the transition from benefits to part-time work will be crucial in restabilizing the labor market and encouraging workers to attach to the labor force before expanded benefits disappear at the end of July.
Maximum benefits under CARES Act, median weekly wage, and number of workers who typically make less than the benefit by state
|State||Max benefit under CARES ($)||Median weekly wage ($)||Number of workers making less than max benefit|
|District of Columbia||1,044.00||1429.6||253,228|
Workers below maximum benefit and unemployment claims
|State||Number of workers who make below max benefit||Unemployment claims (March 7 – April 11)||Unemployment claims/workers who make under max benefit
|District of Columbia||253,228||57,318||23|
v most recent accurate state unemployment numbers