- The coronavirus relief bill, formally the CARES Act, gives jobless workers an extra $600 a week in unemployment benefits.
- The goal is to provide the average out-of-work American with 100% wage replacement.
- Some people, primarily those making low and moderate incomes, could make more while unemployed than while working.
The coronavirus relief bill may allow some Americans who lose their jobs to collect unemployment checks that are bigger than their actual paychecks.
The policy, which would largely apply to Americans making low to moderate incomes, could create distortions in the labor market, according to some lawmakers and employment experts.
Now that President Trump signed the CARES Act into law Friday, employees may delay going back to work, businesses could feel more comfortable laying off people, and workers may be incentivized to quit their jobs or volunteer to be laid off, they said.
"We've never had anything like this before," said Chris Moran, a partner in the labor and employment practice group at Pepper Hamilton, a law firm based in Philadelphia.
The legislation significantly expands unemployment benefits for out-of-work Americans. It comes as Americans are losing their jobs in record numbers.
Those eligible to collect unemployment in their state would get an extra $600 a week in benefits for up to four months. That payment is quite generous, experts said — about 156% larger than the current $385-a-week nationwide average.
That payout, which is in addition to any existing state benefits, could put jobless workers in a better financial situation than they were previously.
Here's an example using a Pennsylvania worker making $30,000 a year.
This worker makes about $577 weekly, before tax, while working. The worker would recoup about half that paycheck in state unemployment benefits — about $288 a week, Moran said. The new legislation would add $600 a week.
This worker's $888 weekly unemployment check would exceed their $577 paycheck over four months.
The break-even point — below which a worker would make more money on unemployment, and above which it would pay to keep working — differs widely among states.
That's because state unemployment benefits vary drastically in terms of eligibility, duration of benefits and check size.
For example, that break-even is roughly $60,000 in Pennsylvania, and about $45,000 in Florida, Moran said.
Unemployment benefits also aren't subject to Social Security and Medicare taxes (7.65% total) and in many states aren't subject to state and local tax — meaning unemployment pay is arguably worth more than typical wages, Moran said.
"People may be motivated to quit their jobs to get higher pay," said Gary Burtless, an economist and senior fellow at the Brookings Institution, a left-leaning think tank.
"This is, I think, a challenge in the time of coronavirus. There are people whose jobs have become riskier," such as nurses, grocery store workers and pharmacists, due to potential for infection, Burtless said.
The expanded benefits are meant to replace 100% of wages for the average worker, according to a House Ways and Means document outlining the changes.
Whereas unemployment isn't typically so generous in normal times, the current public health emergency necessitated richer benefits, the document said. Inadequate wage replacement may have forced workers, especially those who earn low benefits, to continue searching for jobs or working in violation of public health orders.
While the unemployment policy isn't ideal, it's also not too problematic from a practical standpoint, said Susan Houseman, director of research at the W.E. Upjohn Institute for Employment Research.
"We're probably looking at those in the bottom of the wage distribution," Houseman said of those who could potentially collect unemployment in excess of their paycheck.
"One could justify them getting more than 100%, if you saw this as a some sort of economic stimulus package where we're putting money in the pockets of people who need it the most," she said.
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Treasury Secretary Stephen Mnuchin acknowledged "it's not a perfect system" but that it's one borne out of necessity.
State unemployment offices have 35-year old computer systems, and a more complicated unemployment formula would have taken months to correct, Mnuchin told Fox News host Sean Hannity yesterday.
"The simplest way, and the fairest way, was $600 per person. In certain states that might be a little bit too much money. In other states it's less money," he said. "But the president's objective was to make sure you get money in people's hands."
Some experts are also skeptical workers would be able to collect benefits if they quit, which is typically prohibited.
While the CARES Act says workers can get unemployment pay for quitting as a "direct result of COVID-19," it's ultimately up to states to determine how much leeway they want to give workers, according to experts.
There are other mechanisms in place to prevent widespread abuse of the unemployment system, they said. For example, businesses that lay off many workers could face increased tax payments in the future, or states could claw back unemployment pay in some cases.
Plus, as past recessions have shown, when workers lose their jobs, it's hard to find a new one later — let alone one with equivalent pay, experts said.