Unemployment Benefits and Changes under the CARES Act

Introduction

Between March 15 and May 16, the COVID-19 pandemic has caused more than 38.6 million Americans to claim unemployment insurance. The U.S. unemployment insurance (UI) program is a federal and state partnership that provides cash support to people who lose their job through no fault of their own. The COVID-19 Aid, Relief, and Economic Security (CARES) Act, which was passed into law on March 27, offers several forms of direct stimulus payments to individuals, including expanding eligibility rules for UI benefits and adding $600 to weekly cash compensation through the end of July. This Regional Matters will focus on one piece of the expanded UI benefits—the additional $600—to better understand its impact on workers in the Federal Reserve’s Fifth District and what it might mean for their return to economic activity in the next few months.

Unemployment Benefits in the Fifth District under Normal Circumstances

As discussed in a recent Regional Matters post, in normal times, the scope of unemployment benefits—including eligibility, weekly compensation amount, and duration—are determined by each state, subject to federal guidelines. The CARES Act implements uniform temporary changes to the UI program that affect all Americans applying for and receiving this critical benefit.

Typically, states pay a percentage of a worker’s previous wage–up to a capped dollar amount–guaranteed for up to some number of weeks as long as the beneficiary remains attached to the workforce by actively seeking work. Using previous claims data, the U.S. Department of Labor estimates the percentage of wages that unemployment benefits replace, by state–called the “replacement rate.” In the Fifth District, the 2019 replacement rates ranged from 38 percent of weekly wages in North Carolina to 46 percent in Maryland. Fifth District states pay out benefits for up to 12 weeks in North Carolina and up to 26 weeks in the District of Columbia, Maryland, Virginia, and West Virginia. Importantly, each state also sets a maximum dollar amount beneficiaries can receive through the program. Maximum weekly benefit amounts in the Fifth District range from $326 in South Carolina to $444 in the District of Columbia in 2020.

Changes to Unemployment Benefits in the Fifth District under CARES Act

Under the CARES Act, through July 31, 2020, each UI recipient will receive an additional $600 in their weekly benefits, funded by the federal government. To understand implications of the enhanced UI payments on worker wages, we calculate the effective wage of UI benefit amounts by state. As a note, all following calculations assume a full-time, 40-hour work week.

Table 1: Maximum Weekly UI Benefit Amounts and Effective UI Earnings with $600 Increase

Sources: Authors' calculations based on Department of Labor Employment and Training Administration data

For many workers, the combination of the replacement rate and the $600 increase leads to a higher wage than they could earn in the workforce. In Maryland, North Carolina, South Carolina, and Virginia, people earning less than the maximum weekly benefit amount will see an increase in their weekly checks if they receive UI. For example, anyone who was earning an hourly wage of less than $23.15 while employed in South Carolina will earn more weekly on UI; and in Maryland, anyone who was earning less than $25.75 will experience an increase. For the District of Columbia and West Virginia, the wage at which people earn more on UI is under the capped benefit amount. Anyone with a wage or annual earnings less than what is listed in Table 2 below can earn more money on UI through July 31 than they made while employed.

Table 2: Maximum wages at which an individual can earn more UI

Note: Assumes a 40 hour work week.
Sources: Authors' calculations based on Department of Labor Employment and Training Administration data

Potential policy implications

In all five states in the Fifth District, the effective UI benefit exceeds the median wage for all workers, although it is lower than median wage for the District of Columbia.

The difference can be particularly stark for certain industries. The food service sector is a good example of an industry with a very low median wage and which has been particularly hard hit by the COVID-19 pandemic and social distancing orders. Median wages for food preparation, service, and related occupations were less than $10 per hour in North Carolina, South Carolina, and West Virginia and more than $15 per hour in the District of Columbia in 2019. However, on unemployment, these workers could receive the equivalent of almost $19 per hour in North Carolina, South Carolina, and West Virginia and nearly $21 per hour in the District of Columbia. Given the increased benefit, the relaxation of the requirement that workers actively look for work to remain eligible for UI, and the inevitable concern about COVID-19 exposure, the incentives might not be high for many of these workers to return to work before the end of July (when the additional $600 benefit expires).

Surveys indicate that the majority of unemployed Americans expect their layoff/furlough to be temporary and to eventually return to the same job at the same company. In April, 78.3 percent of those unemployed indicated that they were experiencing a temporary period of unemployment, according to the Bureau of Labor Statistics. As a comparison, in April 2019, only 12.4 percent of those unemployed indicated it was temporary. While some of the layoffs will become permanent, many other workers will be called back to work as more businesses begin to reopen. For businesses to return to normal operations, we need mandates to be lifted, health protocols to be put in place, customers to feel safe, consumers to feel confident about their ability to spend, and employees to feel safe and to want to return to work. Until July 31, some employees will face the possibility that their earnings will decline if they forgo UI and return to their normal hourly pay rate.

While the federal government provides the funding for both the extra $600 a week in UI and the expanded eligibility and benefits via the CARES Act, state agencies are left managing UI payment systems and the massive number of claims. States across the country have struggled to keep up with the avalanche of initial claims as well as the sharp increase in ongoing communication required to maintain these claims each week. While some states, such as South Carolina, had already moved to a mostly, or entirely, online application system, many other states, including the other states in the Fifth District, still rely, at least to some extent, on applications via phone or in person. In states where applications are frequently submitted via phone, the number of calls skyrocketed as UI claims rose. This required additional investments in technology and labor as states couldn’t keep up with the call volume. West Virginia sought out an automated cloud-based option, Amazon Connect, due to their increased call volume. On April 20, the day the technology was launched, they serviced a record 61,252 calls. What is more, online application systems were designed for the state unemployment programs and substantial reprogramming was necessary to accommodate all of the changes required by the CARES Act. State agencies have undoubtedly faced increased infrastructure and technology costs related to the new and expanded federal UI benefits, putting a strain on already stretched state resources.

Conclusion

Unemployment insurance is an important automatic stabilizer when economic contractions occur, as the benefits enable workers to continue with critical spending, such as mortgages or groceries. In this particular health crisis, these payments play another important role. As businesses closed and people were encouraged to social distance and stay at home, receiving additional funds via UI helped those displaced from their employment to do just that. The typical UI job search requirements were dropped and the additional $600 a week provided substantially more income than people would have received from UI otherwise. This may have been part of the design of this program, and if so, then the sharp decline in mobility seen in recent weeks may indicate that this goal has been met.

Of course, there are other benefits to work, including stability, routine, and pride. Many workers will return to jobs where they will receive less money weekly than they got from UI because they value the stability that comes from knowing they have employment or they fear that finding a job after the enhanced UI benefits end will be very difficult.

Policies might change going forward. There is an ongoing discussion of extending the $600 per week federal payments until January 2021. In fact, the House of Representatives passed such an extension in the HEROES Act on May 15. The costs and benefits of such an extension must be carefully weighed as policymakers decide what additional stimulus will be provided in the coming weeks and months.