Yes, most workers can collect more in coronavirus unemployment than they earn – but that doesn't mean Congress should cut the $600 supplement

Americans who lost their jobs because of the pandemic had been getting a US$600 bump on top of state benefits in their weekly unemployment checks since March. That ended on July 31, and lawmakers are debating^[1] whether to extend the program and if so by how much.

Senate Republicans are arguing^[2] it’s too generous to the 18 million who are unemployed^[3] and serves as a disincentive to returning to work. Their initial proposal in the ongoing negotiations would slash the benefit to $200 a week.

As an empirical economist^[4], I wanted to see if their concerns about the disincentive were valid. So I analyzed data on earnings and unemployment benefits to estimate the share of benefit-eligible workers who could collect more on the dole than on the job.

Replacement wages

I started my analysis by looking at 2019 Current Population Survey^[5] data to estimate weekly earnings of private-sector employees, both nationally and state by state. I then adjusted the numbers for wage inflation and compared the results with jobless benefits and “replacement wages,” which vary from state to state.

Iowa is the most generous^[6] and replaces 49% of a worker’s weekly wages with a cash benefit when he or she loses a job involuntarily, while Alaska is the stingiest and replaces only 28% of income. I estimated that on average the replacement rate for all workers in the U.S. was about a third.

Once the $600 federal supplement is added in, the national average wage replacement rate soars to 127%. On an individual basis, I found that 56% of eligible workers would receive more in benefits than they would earn gainfully employed. Among those workers, the average excess benefit was $253.

This figure also varies in each state, depending on replacement rates as well as average weekly earnings. For example, benefits exceed their earnings for little more than a third of workers in Washington, D.C., while that figure is 75% in New Mexico.

If Congress passes a lower federal supplement of $200, the result would drastically change the picture. As a result, I estimate only 9.5% of workers across the country would receive more in benefits than what they could earn – on average about $61 – and the replacement rate would drop by half to about 65%.

The Republican plan would eventually have the $200 supplement replaced^[7] with a system that provides workers with a combined state and federal benefit equal to a replacement rate of 70%. The federal share would be capped at $500.

Why $600 is still important

While Republicans are right that the $600 jobless benefit may seem high, that alone does not mean it should be cut.

The unemployment insurance program started^[8] in 1935 soon after the Great Depression ended with two major objectives: to provide temporary partial wage replacement to unemployed workers and to help stimulate the economy during recessions.

The second objective is important. With the U.S. economy sinking into recession, a more generous supplement acts as a powerful stimulus. Consumer spending makes up more than 70% of the economy^[9], and most of those who receive the benefit will spend it quickly. This powerful and ongoing jolt would help revive the economy^[10] – or at least keep it alive – as well as offset^[11] worries that economic inequality^[12] will soar as a result of the pandemic.

In addition, unemployment insurance only replaces wages. A job often comes with other benefits, such as health insurance and retirement plans. Even full-time service workers in the private sector, who as a group earn less than $15 per hour in wages, receive an average of $1.99 per hour^[13] in employer-paid insurance, mostly for health care.

Overall, non-cash job benefits amount on average to 19% of total employee pay. Factoring in that non-cash dollar value reduces the average replacement rate to 108% and lowers the share of employees receiving excess benefits from 56% to 43%.

[Deep knowledge, daily. Sign up for The Conversation’s newsletter^[14].]

Finally, employment insurance works in a way that limits its ability to act as a disincentive to work. People who quit their jobs voluntarily are ineligible for benefits. And someone without a job who receives a suitable offer of employment is no longer eligible to continue receiving benefits. That’s one explanation cited in a recent study by Yale economists that found no evidence^[15] that the $600 federal supplement reduced employment.

Altogether, I find Republican concerns that the $600 supplement dissuades work unpersuasive in the context of the current pandemic. A generous policy that helps support the economy and aids those at risk of losing their homes^[16] or struggling to feed their families^[17] seems more sensible than one that assumes someone collecting unemployment benefits could just as easily be working^[18].

References

1. ^{^} lawmakers are debating (www.cnbc.com)
2. ^{^} Senate Republicans are arguing (www.axios.com)
3. ^{^} 18 million who are unemployed (www.bls.gov)
4. ^{^} empirical economist (publicpolicy.umbc.edu)
5. ^{^} Current Population Survey (www.census.gov)
6. ^{^} most generous (oui.doleta.gov)
7. ^{^} replaced (www.cnbc.com)
8. ^{^} program started (www.brookings.edu)
9. ^{^} makes up more than 70% of the economy (www.marketplace.org)
10. ^{^} would help revive the economy (www.cnbc.com)
11. ^{^} offset (www.nber.org)
12. ^{^} worries that economic inequality (www.theatlantic.com)
13. ^{^} receive an average of $1.99 per hour (bls.gov)
14. ^{^} Sign up for The Conversation’s newsletter (theconversation.com)
15. ^{^} found no evidence (news.yale.edu)
16. ^{^} risk of losing their homes (theconversation.com)
17. ^{^} feed their families (www.cnbc.com)
18. ^{^} assumes someone collecting unemployment benefits could just as easily be working (money.yahoo.com)