Replacement Wages; a Smart Pandemic Recession Program

In March, Congress passed the CARES Act which in part expanded Unemployment Insurance (UI) to help workers losing jobs as a result of the Covid-19 pandemic.  The pandemic has required strict measures to lessen the spread of the virus, such as social distance, stay-at-home orders, and mandatory closure of some businesses.  These measures have dealt a serious blow to the economy in the form of lost production and services and lost wages – both sides of large numbers of basic economic transactions.  Not even war is as difficult for an economy to deal with.  It is unprecedented, and so is the economic solution.  Within a short time, 21 million workers were laid-off as a result of business closures.  One provision of the Act creates an additional $600 per week unemployment insurance benefit to help workers losing jobs to weather the shut-down.  It also benefits businesses reopening more quickly by maintaining contact with their employees for recall when the economy receives clearance to restart. The $600 benefit payment is administered through each state’s Unemployment Insurance system.  Each laid-off worker obtains a weekly benefit comprised of the state UI payment and federal UI of $600,  The state UI payment is not changed by the CARES Act, only the federal UI is changed at $600, and is the same for every unemployed worker, whether in the lowest or highest average pay category.  Since the federal portion of UI is a fixed amount (state benefits are variable), it represents a higher percentage amount to a worker in the lowest wage and a smaller percentage for a worker in the highest wage category.  Thus, lowest-wage workers obtain more than 100% replacement of their wage.  Health insurance and other fringe benefits are not paid by UI, and those benefits ceased when workers are laid-off. The lowest wage paid to any worker is $7.25 per hour.  That work will obtain replacement wages of more than $900 per week, including the state UI.  This provides substantial liquidity at the bottom of the wage scale, whereas at the top level-wage, benefits which would before cover only 20% of weekly wages, are increased to 50%.  

National Bureau of Economic Research (NBER) Working Papers 27216 and 27217 analyze worker and private business impacts of the pandemic recession, and include the following findings.  Men and women were equally laid-off initially for the first month of the recession and thereafter through May 30, women were laid-off 4% more frequently than men. Lowest-wage workers were laid-off sooner, more frequently, and recalled later than higher-paid workers.  Just the opposite occurred for older-age employees, more-tenured, higher-paid who were laid-off later and sooner recalled.  The latter, are a business’s most important workers.  

One had to be employed on or after February 15 to be eligible for enhanced UI benefits. NBER reported changes in employment for fifteen industry categories for the period beginning  February 15 and  ending April 25 and May 30.  As expected, the results were widely variable by industry.  Entertainment and Arts lost just over 50% of employment by 4/25 and recovered only to 41.5% by May 30.  Hotel and Food service changes were 43.5% and 34.1%.  Construction and Manufacturing employment fared better; respectively 13.5% and 4.5% for Construction and 12.4% and 8.6% for manufacturing.  These are bellwether, high-pay industries for the economy.  Educational services were 16.5% in April and became 17.5% in May.  This may not be attributable to lay-offs, but rather to a mid-term vacation at the end of a semester.  

NBER’s database could trace each weekly wage payment to real anonymized wage earners and including job description, tenure, age, and gender. This provided a means to trace businesses’ survival over the period 2/15 through 5/30/2020 as;  a.) Continuing without interruption, b.) Shut down, c.) Rentered after shut down,  and d.) New entries.  Significantly, Reentering businesses recalled or added new employees to reach the same employment as  February 15.  The largest category of businesses recalled 90% of their former employees.  Continuers, predominantly the largest businesses were below February 15 employments by 12.4%.  There is no doubt improvement has continued beyond May 30.  

The CARES Act Supplemental UI ends July 31.  Congress should continue the program until the economy has recovered.  I can’t think of a better program than this wage-replacement program whether it be aimed at poverty or business-cycles.  However, the program should replace the fixed $600 amount of federal UI payment with a variable amount of 45% of a wage-earner’s basic wage. This will bring all wage levels – from lowest to highest — closer to the appropriate full-replacement target. The total amount of federal subsidy for all replacement wages will be less than before.  With that change, this is very smart public policy.                                                                                                   July 13, 2020