The Unemployed and Essential Low-Wage Workers After the CARES Act
Dartmouth College and Wellesley College
The recently enacted Coronavirus Aid, Relief, and Economic Security (CARES) Act significantly increases the generosity of Unemployment Insurance (UI) benefits. The provisions of the CARES Act go well beyond doubling the average UI benefit of $356 nationwide: Workers eligible for benefits are entitled to an additional $600 benefit per week beyond their usual benefit for the next four months. This is very generous and progressive, replacing a larger share of the wages for low-wage workers and, in some cases, even providing a higher amount than the workers' pre-crisis weekly wage. This ensures that those who are most likely to be hurt are able to meet basic needs during the crisis and have money to spend when the pandemic abates to help jumpstart the economy. However, low-wage workers who continue to work, and whose jobs have become even more valuable to society in the crisis, should be compensated for the inequities they now face.
The generosity of the UI benefit increase will help the economy recover but marks a sharp contrast with low-wage workers who remain employed providing services we need during this crisis.
- The UI benefit provisions of the CARES legislation are very generous. Eligibility, benefit determination and administration of the federal-state unemployment insurance program are all determined at the state level. Workers typically receive UI benefits that equal half of their pre-unemployment wages up to a maximum level of benefits, which differ across states. UI benefits hit a maximum of $235, $450, and $790 per week in Mississippi, California, and Washington, respectively, which serve as examples of low, medium, and high benefit states. The “replacement rate” — the ratio of UI benefits to pre-unemployment wages — in these three states is 50 percent for workers below the maximum benefit and it declines as wages surpass it. (That is, if someone lost their job, they would receive the equivalent of half their weekly wages in UI benefits, provided their wages were below the maximum benefit). The dotted lines in the attached figure illustrate the replacement rate in the traditional UI system across these states for different levels of the hourly wage for full-time workers (40 hours per week). The solid lines highlight the replacement rate incorporating the $600 supplemental benefit that all beneficiaries receive under the CARES Act. The new system is far more generous; replacement rates for all workers are now considerably higher than they were before.
- The benefit increase is designed to be strongly progressive. A $600 fixed benefit increase is much larger relative to pre-unemployment wages for lower-wage workers. Indeed, workers earning $10 per hour (above the national minimum wage of $7.25, but below some state-specific minimum wages) who work full-time will now receive UI benefits that are actually twice what they would have earned had they been able to work. The value of the replacement rate falls as workers’ wages rise because the $600 supplement is fixed. A full-time worker in Mississippi would receive UI benefits greater than or equal to their pre-unemployment wage if they were earning up to $21 per hour (or $43,680 per year). In Washington, which has a much higher maximum benefit, this would occur for individuals who were earning up to $30 per hour ($61,200 over a full year). The fact that the policy provides greater benefits to lower wage workers introduces an equity element to the benefits that may not exist in other components of the legislation.
- Unemployment Benefits are acting more like stimulus and less like insurance. Typically, policy-makers design UI benefits such that they help workers through an unexpected job loss without reducing their incentives to seek employment. It acts as a form of insurance. Just like other forms of insurance, it typically replaces less than the full value of the loss. Providing full coverage (or more?) would introduce “moral hazard,” which occurs when people change their behavior in a way that makes the loss more likely to occur. A deductible accomplishes this in auto insurance, for instance. During a typical recession, UI acts as an insurance policy that also reimburses damages brought about by an unforeseen loss. In that framework, replacing less than the full loss makes sense. The generosity of the UI provisions in the CARES Act, paying up to twice pre-unemployment wages, violates the moral hazard principle. In the present context, though, it should not be thought of as insurance. While some have focused on the role of the CARES Act in providing relief during these times, this UI provision is better thought of as stimulus – providing generous funds to low-wage workers so that they can return to typical spending patterns after this health crisis ends. The relatively short four-month duration of this benefit increase further highlights this focus on stimulus.
- The generosity of the UI benefit increase marks a sharp contrast with low-wage workers who remain employed providing services we need during this crisis. We could not survive this crisis without cashiers and shelf stockers at the grocery store, nursing home aides, building custodians, and the like. According to our calculations from 2019 Current Population Surveys (CPS), all these workers make around $17 per hour, on average. If they were not working, they could collect UI benefits that were 25 to 35 percent greater than their current wage depending on the state they live in (see chart). Disadvantaging these workers generates an unintended inequity. We calculate that there are almost 1.2 million workers in those jobs. It would cost about $1 billion per month to provide them with a 30 percent wage subsidy. Other occupations may be included as well at greater cost, but our focus here is on lower wage essential workers disadvantaged by the recent UI reforms. Presumably subsequent stimulus legislation will be necessary and a provision like this that provides wage subsidies for essential service workers should be included.
- Theories of how the labor market operates suggest these essential workers should receive greater pay right now anyway. Economists routinely introduce the concept of compensating differentials to explain why certain occupations, which involve greater occupational risk, such as coal mining, pay more than one might expect based on the educational requirements of the job. Working in a grocery store wasn’t a high-risk occupation up until a few weeks ago. It is now, though, implying that wage subsidies should at least eliminate the gap between working and collecting UI to at least somewhat compensate for that risk. Economists also view wages as being set based on a worker’s contribution to the firm. Now, workers in these occupations provide benefits to society beyond what the firm receives. In other words, the social benefit is greater than the private benefit. A firm would never pay that additional amount since they do not receive those additional benefits. But it is in society’s best interest that workers receive additional compensation in return for the greater social value of their output.
What this Means:
In a typical world, we would never support an expansion of the Unemployment Insurance system as extensive as the one that was introduced. It wouldn’t make sense in the context of a normal business cycle. There is nothing normal about our current circumstances, though. The ability to quickly pull out of a full and immediate stop on economic activity is paramount if we are to avoid a prolonged period of serious economic hardship. Increasing the generosity of the UI system as much as the CARES Act does, not only makes sense for that reason, but it does so in a way that emphasizes the well-being of lower-wage workers, a policy focus that is often lost. We also support the idea of providing equitable outcomes to other lower wage workers who maintain their employment, because it is important to society that these workers continue to do their essential work.