Did the CARES Act Help Counter Pandemic-Fueled Growth in Inequality?

The Issue:

The CARES Act expanded access to unemployment insurance (UI) to millions who are typically ineligible to receive benefits and gave all UI beneficiaries an additional $600 per week for a limited period of time. Due to the structure of the payments — which replace a proportionately larger share of lost wages for low-wage workers —  and the disproportionate way in which pandemic job losses hurt low-wage workers, we estimate that the CARES Act increased average earnings growth for the lowest earning workers by 20 percentage points or more before the funds expired on August 1st.

A combination of markedly worse job losses for low-earning workers and the increase in UI benefits made the CARES Act very progressive.

The Facts:

• The CARES Act responded rapidly to an unprecedented drop in employment by significantly expanding the coverage and generosity of unemployment benefits. Between March and April of 2020, employment contracted by 20.5 million jobs in the United States. The U.S. unemployment insurance system typically pays 30-40% of lost wages to employees who lose work through no fault of their own. Facing the prospect of tens of millions of Americans losing income, the U.S. Congress reacted quickly and the CARES Act was signed into law on March 27th, 2020. The CARES Act extended the unemployment insurance system in three ways: The Pandemic Unemployment Assistance (PUA) program extended UI benefits to individuals who are not eligible for standard UI – including those with insufficient earnings to qualify and those who are self-employed; Second, the Act extended the maximum number of weeks of benefits by 13; Third, the Federal Pandemic Unemployment Compensation (FPUC) program provided a flat payment of $600 per week to each UI recipient (see here). These payments expired on August 1st, 2020.
• Job losses associated with the pandemic were substantially worse for low-earning workers. We estimate that twice as many individuals in the bottom 20% of the earnings distribution lost work in April through July compared to individuals in the top 20%. This meant that — absent any policy intervention — the pandemic's impact through July would have likely led to worsening earnings inequality by disproportionately reducing the employment of workers in the lower range of the earnings distribution. We arrive at these estimates of the composition of employment loss using data from the Current Population Survey (CPS), the official source for labor market statistics in the U.S., which allows us to identify individuals who lost employment during the pandemic and track individual-level changes in earnings. 
• Although the expansion of UI benefits in the CARES Act was roughly intended to replace 100% of workers' wages, in practice it gave a majority of displaced workers more in benefits than they would have earned from work. The $600 FPUC payment was chosen to replace 60% of the weekly earnings of the median worker, in order to bring the total earnings replacement between standard UI and the FPUC payment to 100% of the worker’s previous earnings. However, because job losses were greater among lower wage workers, the median weekly earnings of pandemic-displaced workers was only $519 (compared to the $1,000 working assumption). This meant that the $600 replaced more than 60% of wages for most UI recipients, and total UI benefits were over 100% of previous earnings for 80% of displaced workers. 
• The combination of the inequality in job loss and the flat $600 benefit, as well as the benefit expansion from the PUA program led the CARES Act to be an extremely progressive program, raising average wage growth for the bottom quarter of workers by 20 percentage points or more. Using information on the workers who lost employment (in particular the wages they earned when employed and their state of residence), we are able to simulate expected unemployment insurance payments. This allows us to estimate how the change in earnings — both through wages and through unemployment benefits — varied across the pre-displacement earnings distribution (see chart). Such an analysis is not possible from cross-sectional data or from data collected by state UI agencies on benefit recipients. We calculated total benefits paid exceed total lost wage earnings by at least 9 billion dollars. Workers who were in the bottom third of the earnings distribution received 49% of the total UI payments from the CARES Act and standard UI payments. It is worth noting that, although the programs that expanded UI benefits under the CARES Act were very successful in replacing income and increasing consumption for recipients, many individuals were ineligible for this aid. We estimate that around 5% of individuals that we predict to be eligible for UI or PUA did not receive benefits. Further, about 30% of individuals who lost employment during the pandemic period do not meet our screen for UI eligibility. These workers are much more likely to be low-earning, and hence in most need for stimulus payments.
• Not only does the UI benefit expansion provide income support to the individuals affected, it also increases spending in the economy as benefit recipients spend their checks. The best policy to stimulate the economy is to get money to individuals who will spend the money rather than save it. New research found that the $1200 stimulus checks were spent at the highest rate by individuals who had lost work and low-income individuals. Thus these CARES Act UI payments directed benefits to individuals that were likely to have provided the biggest stimulus ’bang for the buck’, reducing the severity of the recession. While the generosity of UI under the CARES Act raised the concern that the benefits may have discouraged recipients from seeking work, potentially slowing the recovery, so far there has been little evidence of this channel. Researchers have found that job applications-per-vacancy increased during the crisis (see here). Similarly, one study found no evidence that states with a higher UI replacement rate had lower employment, while a separate study found evidence that states with more generous unemployment insurance benefits saw a smaller decline in employment and a faster recovery for small businesses.