The nation has, so far, relied on an overwhelmed unemployment insurance system to help workers weather the COVID-19 crisis. Now, as we enter the next stage of economic relief and recovery, more powerful tools are needed to protect the economy from the damage caused by further job loss and to get Americans back to work. To keep businesses from permanently shuttering and workers’ bills paid, Congress should create a program in which the IRS gives grants directly to employers to keep their workers on payrolls.
It’s Not Unemployment’s Fault
America’s unemployment system is swamped and can’t keep up. A staggering 30 million Americans have filed for regular state unemployment benefits, crashing state websites and forcing states to borrow federal money to make benefit payments. A recent study conducted by the Economic Policy Institute found that, for every ten workers who successfully filed a claim for unemployment benefits, three or four people attempted to apply but gave up. TCF’s own research found that only one in seven individuals who applied for help during the month of March received an unemployment check. The situation improved in April, as 64 percent of applications have been processed, but that percentage includes millions of workers whose applications are pending, many of whom have been waiting for their state agency to decide their claims since March, and have faced both their April and May rent without the benefit of a paycheck or an unemployment check.
Certainly, unemployment insurance is intended to serve as our economy’s “shock absorber,” and has served that role for seventy years. But while the system has always had some shortcomings, it simply was not designed for an unprecedented situation like this: an economy brought to a standstill by a pandemic, and one that will certainly struggle to reopen (or reclose) over the coming months, as the nation battles on with COVID-19.
The problem is actually not with the unemployment system. The fact that one in five Americans covered by unemployment benefits has tried to get help within just the first six weeks of the COVID-19 crisis actually represents a policy failure to intercede more directly and save jobs before businesses closed.
The fact that one in five Americans covered by unemployment benefits has tried to get help within just the first six weeks of the COVID-19 crisis actually represents a policy failure to intercede more directly and save jobs before businesses closed.
This failure to save jobs and stabilize family finances has also had massive public health implications. Not only has job loss also meant the loss of job-provided health coverage, but also, the inability of Washington to deliver timely continuation of income is contributing to growing American impatience with the social distancing that is required to keep the COVID-19 at bay while adequate testing is deployed and a vaccine is developed. One member of the Facebook group “Florida Unemployment Problems” put it very clearly when she said that she heard politicians ask her to stay home and stay safe, but she can’t, because of the withholding of unemployment benefits: “I don’t feel safe at home, I am actually in grave danger facing homelessness, hunger and hopelessness.” Americans cannot be expected to make the sacrifices needed to preserve public health if their economic situation is so precarious.
Paycheck Guarantees Offer a Better Path to Recovery
Unemployment insurance has required tens of millions of individual claims to force their way through the narrow processing pathway of unemployment insurance agencies that requires states to check the veracity of each claim, one-by-one. (While some states allow and even encourage their employers to file unemployment claims for groups of employees, this is a small minority of claims.) This has been a slow, labor-intensive process for state agencies.
Major European nations took a different approach in the wake of the contagion, giving grants directly to employers to keep their workers on payrolls, regardless of whether they were able to keep their doors open. In Denmark, such grants represented 75 percent of the pay given to salaried workers, and 90 percent to those in lower-paid hourly jobs. In the United Kingdom, payouts were set at 80 percent of pre-crisis wages and were contingent on companies keeping their workers on payroll. Germany has ramped up its existing Kurzabeit program, which allowed German companies to keep 1.5 million employees on payroll during the Great recession, and likely millions more during the COVID-19 crisis. As a result of these efforts to keep workers on payrolls, the Eurozone unemployment rate is currently just 7.4 percent, while the U.S. unemployment rate may soon reach as high as 18 percent or more.
The Eurozone unemployment rate is currently just 7.4 percent, while the U.S. unemployment rate may soon reach as high as 18 percent or more.
The U.S. response to maintaining employment—the Paycheck Protection Program (PPP), enacted by the CARES Act—has not had the same impact. While hundreds of billions of loans have been authorized through PPP, these funds have not flowed freely to payrolls. Firms have been wary about spending the funds, because of confusion over how much of the loans will be ultimately forgiven if a business is unable to keep employees on payroll (only payroll, rent, and utilities can be written off). Furthermore, the PPP funds can only be delivered by one of 800 Small Business Administration–approved banks, a system that has been anything but efficient, and the first tranche only reached five percent of small businesses. Moreover, the PPP has been criticized as putting aid out of the reach of the minority-owned businesses and microenterprises, with larger publicly traded companies taking advantage of the aid. Most importantly, the program is set to authorize only 5.6 million loans, far short of the 30 million small businesses in America, half of whom have indicated that they need such aid.
Leaders in Congress, of various political orientations, have outlined approaches to protect payrolls via grants to stem the tide of unemployment. Representative Pramila Jayapal (D-WA), the co-chair of the Progressive Caucus and a former worker rights organizer, introduced a Paycheck Guarantee program that would cover 100 percent of impacted worker’s salaries for three months (up to $90,000 per year per worker). Payment of the grants would be based on a streamlined process using records of wages reported each quarter for federal taxation, and paid directly by the IRS rather than through banks. To encourage businesses to take up the aid and be able to keep operating, the grants would cover 25 percent of necessary business expenses above payroll.
In addition, an ideological diverse quartet of Democratic Senators—Mark Warner, Bernie Sanders, Doug Jones, and Richard Blumenthal—have sketched out a similar plan released on April 17, covering up to $90,000 in worker’s salaries for businesses who have experienced at least a 20 percent job in revenue and have not received business aid from previous COVID-19 legislation. For his part, Representative Dan Kildee, a leading member on the powerful House Ways and Means Committee, has proposed an expansion of the much smaller American version of the German Kurzabeit program, the short-time compensation program operated through unemployment insurance. These schemes keep workers on payrolls and benefits, but do so part-time with generous partial unemployment checks making up the difference. Kildee’s proposal would allow companies keeping their workers on staff for as little as one day to receive 100 percent federal funding for the unemployment benefits for the other four days.
Conservative Republican Senator Josh Hawley has joined the call for paycheck protection with a more modest plan that would deliver grants up to 80 percent of the median wage through the Treasury. Conservatives such as Hawley have been inspired by intellectuals such as Samuel Hammond of the libertarian Niskanen Center, who have emphasized their preference for keeping workers connected to their employers through this economic storm and into recovery. It’s a view echoed by organized labor as well, keenly focused on how maintaining connection to an employer preserves not only benefits but also collective bargaining power to negotiate the reopening of the economy.
The Return to Work Will Not Be the Flipping of a Switch
Negotiations over the next coronavirus package have dragged on past the Trump administration’s May 1 target date for reopening the economy. While major population centers such as New York and California remain largely shut down, states in the South and the Midwest such as Georgia, Iowa, and Oklahoma are reopening despite serious remaining public health fears. The Trump administration has reverted to old saws like a payroll tax credit and reinvestment tax credits to revive the economy in time for the November election.
Yes, it would have been better if Congress had rolled out a Paycheck Guarantee from the get-go, rather than the PPP, which has been fraught with difficulties. But launching such a program will still make a big difference right now. The most recent unemployment numbers suggest things could get worse. In the week ending April 25, an additional 3.9 million Americans newly filed for unemployment benefits. Retailer J. Crew has filed for bankruptcy and major department store chains such as Neiman Marcus may not be far behind. Given the cited problems with the original CARES Act job-saving programs, there is a strong argument for a more effective payroll protection plan for those who have not been able to avail themselves of previous aid. As Congress considers its next moves, it is a time for a more serious effort by the federal government to support jobs and payrolls during the COVID-19 crisis. This aid would not only save jobs, but the spending it would unleash would provide the stimulus to mitigate the current depression.
Congress will have to adjust payroll protection ideas to the current reality that businesses may not be forced to be closed in certain parts of the country. Regardless, a new payroll protection plan should be backdated for at least one month before the date of enactment of the next relief package and provide at least two months of payroll support at pre-crisis levels. This would provide companies with an immediate, and direct incentive to rehire their workers, at a time when they are starved for cash and capital after weeks of lost revenue. And, it would enable firms to rehire workers now and pay them, even if they don’t have the kind of personal protective equipment needed to reopen their establishments and deploy them in their old jobs. Firms could use the grants to make necessary modifications and purchases to reopen when it is possible. And, any new plan should be devised in a way that it can quickly respond if the virus spikes again in certain communities, forcing regional officials to shutter the economy again. Aid should be renewable for employees in states that remain under public health orders and that are suffering from high rates of unemployment.
Paycheck protection could be particularly important for nonprofit and government employers who were forced to trim payrolls due to declining revenues. These entities will struggle to recover for this lost period and would be unable to pay back any federal loan programs. Rehiring grants through Jayapal, Sanders, or Hawley’s plans could enable these agencies to get back on their feet and also begin providing services at a reasonable level. Expanded short-time compensation schemes could enable employers to start bringing their workforce back part-time, before they have enough customers and revenues to return to full capacity.
Despite the real possibility of major COVID-19 outbreaks, the nature of the coronavirus challenge is evolving. Unemployment insurance has done its best to staunch the bleeding, and will continue to be needed as the lost demand during the COVID-19 shutdowns will reverberate into 2021 and leave us with stubbornly high levels of joblessness. The restaurant meals forfeited, the conferences and trips canceled, and services not rendered represent a permanent economic loss that will depress economic activity throughout the rest of 2020 and beyond. Beyond unemployment insurance, the challenge is to stimulate the economy out of the unprecedented and necessary torpor.
Directly subsidized employment was a major part of the federal government’s toolkit during the Great Depression of the 1930s but has largely disappeared from view since then. Perhaps the COVID-19 crisis which has the potential to produce jobless rates that could rival the Great Depression, could spur the federal government to make a more serious investment in subsidizing hiring and rehiring. The fact that diverse ideological leaders have a common view of this need is a good sign. Lets just hope that Americans, and Congress, won’t yet again underestimate the health and economic damage that this virus can unleash.
This research is supported by the Bernard L. Schwartz Rediscovering Government Initiative.