What happens if unemployment benefit enhancements expire : The Indicator from Planet Money Unless Congress acts, unemployment benefit enhancements will expire. And that could have big effects on the economy.

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Hey, everyone; Stacey and Cardiff here. This is THE INDICATOR FROM PLANET MONEY. Today the U.S. Congress is back in session after a couple of weeks off since the Fourth of July holiday.


While members of Congress were away, deaths each day from coronavirus started climbing. And economic indicators started showing dramatic signs that the economy is slowing down, and that means that Congress is already very busy negotiating a new bill for how to respond to the economic slowdown.

GARCIA: Now, back in March, the government passed the CARES Act, which was a big package of more than $2 trillion that provided money for people, businesses and state and local governments. But some of the money from the CARES Act is running out now, and one part of the bill that was putting more money directly into the hands of people who were out of work is set to expire soon.

VANEK SMITH: Specifically, the bill provided an extra $600 a week in unemployment benefits on top of the regular unemployment benefits that people get from their states. Tens of millions of out-of-work people in the U.S. have been receiving those payments. And unless Congress acts fast, the last $600 paychecks will go out this weekend.

GARCIA: Today on the show - Congress is back, and the clock is ticking. In less than a week, unemployed people will stop receiving those expanded benefits. And the effects could be huge not just for people who are unemployed but for everyone and for the whole U.S. economy.


VANEK SMITH: It varies by state. But typically, unemployment insurance benefits will give you a third to half of the wages that you were making when you were working your job. The extra $600 per week in the benefits from the CARES Act was on top of those regular benefits. And this means that there are a lot of people who are actually making a little bit more money receiving unemployment benefits than they were working their actual job.

ERNIE TEDESCHI: All told, about 30 million people right now are getting some form of unemployment insurance and, therefore, are getting this additional payment as well.

VANEK SMITH: This is Ernie Tedeschi. He's an economist with Evercore ISI.

TEDESCHI: So with this emergency unemployment insurance payments, now two-thirds of workers are making more than they made before, when they were working.

VANEK SMITH: And Ernie says there was understandable logic behind making these additional unemployment benefits very generous. First of all, coronavirus had made it necessary to close so many businesses, especially businesses in the service sector like restaurants and bars.

TEDESCHI: This was felt to be an extraordinary circumstance that was of no fault of the worker or the employer.

GARCIA: Basically, says Ernie, it made sense to pay people to stay home because that would slow the spread of the virus. And, Ernie says, there is a second justification for why the benefits were generous.

TEDESCHI: Unemployment insurance is very good economic stimulus because it's so well-targeted. Unemployment insurance goes to people who need it. And because it generally goes to low- and middle-income workers, they're very likely to spend it.

VANEK SMITH: Those low- and middle-income workers who lost their jobs may not have that much money saved up. And so the money they get from the extra unemployment benefits could be money they really need; money to buy groceries, money to pay rent. As Ernie says, it is money they are likely to spend. And that spending supports other parts of the economy as well.

GARCIA: Yeah. Think about it. If people have money to spend on groceries, then the grocery store can afford to pay its own workers. And the grocery store will also order more food from farmers. And that means that the farmers will have money to order equipment from manufacturing companies and so on. Spending is the lifeblood of an economy. And because the expanded unemployment benefits are being given to people who are most likely to spend them, Ernie says he thinks it's a policy that made sense.

VANEK SMITH: It is also a policy that is about to expire.

TEDESCHI: If the program weren't extended, overnight, if you're on unemployment insurance, you would see your income shrink by 50- to 75% just overnight because you're losing that $600. I mean, that's a devastating hit to these workers.

VANEK SMITH: And, Ernie says, it could be a devastating blow to the economy as well because those unemployed workers will not have that money to spend on other businesses on groceries and things like that. Ernie, in fact, just completed a study that tried to estimate just how big the blow to the economy would be if the program were not extended.

TEDESCHI: And I found that the economy, by the end of the year, would be 2% smaller than it would be had we fully extended it.

GARCIA: In a normal year, as Ernie points out, the U.S. economy grows by about 2%. So the choice not to extend the bigger unemployment benefits would have the same effect as wiping out an entire normal year's worth of economic growth. Plus, according to Ernie's projections, an estimated 1.7 million fewer people would have a job at the end of the year.

VANEK SMITH: Right now this issue is caught up in the horse-trading negotiations in Congress. Democrats generally want to extend the extra payments through the end of the year. It is a priority for them. Republicans have their own preferred policies. For example, they are concerned about shielding businesses from legal liability if workers get coronavirus while on the job. And that way, they say, businesses could feel more confident reopening.

GARCIA: And there's another possible argument against expanded unemployment benefits, which could be that it just feels unfair for people who are unemployed to now be making more money than they had been making at their jobs at the same time that essential workers - people like grocery store cashiers and nurses, people who take big risks to their personal health by continuing to work - have had to keep working without a pay raise. Now, of course, some people have argued that Congress could just do both. It could keep those bigger unemployment benefits and also pay essential workers more money.

VANEK SMITH: And still another possible objection is that the added unemployment benefits might discourage people from going back to work, even if jobs become available again. In fact, that is the argument that some of the president's economic advisers have made. And some companies have reported having trouble finding workers to fill jobs.

GARCIA: Yeah. The thinking here is that if you can make more money getting unemployment benefits, why bother going back to work? So Ernie studied this possibility as well, and here's what he did. Some states pay unemployment benefits that are bigger, more generous than in other states. And if it is true that unemployment benefits were discouraging people from working, then you would expect to see a smaller share of people taking jobs as jobs become available in those states where the unemployment benefits were bigger.

VANEK SMITH: But in the months of May and June, Ernie says, that was just not the case. He found no relationship between how big the unemployment benefits were and the likelihood of somebody taking a job.

TEDESCHI: And I did this, you know, every way I could think of to try to find, you know, OK, under what circumstances might there be an effect? And nothing came up, so it was a surprising result.

VANEK SMITH: A recent study from the Brookings Institution, a think tank, found the same thing. And as to why that might be, why it is that people have not been discouraged from working even though unemployment benefits replace so much of their lost wages, Ernie says it's important to remember that we are in very strange circumstances right now with a lot of uncertainty. And those circumstances can affect the choices that people make.

TEDESCHI: Someone could look at this and say, I don't know how long emergency unemployment insurance is going to last. And my job is available right now, so I'm going to take my job because that's more stable than emergency UI.

GARCIA: And, Ernie says, there is another possible reason why people who are getting bigger unemployment benefits would still return to work.

TEDESCHI: Let's also not forget that, actually, under unemployment insurance, if an employer offers you a job and you refuse it as a worker, you can lose your unemployment insurance. That employer is allowed to report you to the state Department of Labor where you live. And you're technically supposed to lose your unemployment insurance, so employers have some leverage over this process too, even with the emergency unemployment insurance.

GARCIA: So the conclusion of Ernie's analysis is that the expanded unemployment benefits are not keeping people from going back to work. So many people are claiming those benefits mainly because the labor market just remains in such bad shape. But in any case, in the meantime, you can expect Congress to continue debating the outlines of its next package. Though, at the moment, it seems unlikely the Republicans and Democrats will reach an agreement by the end of this week.

This episode of THE INDICATOR was produced by Darius Rafieyan and fact-checked by Brittany Cronin. THE INDICATOR is edited by Paddy Hirsch, and it is a production of NPR.


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