Getting rid of extended jobless benefits would come with a big economic hit

Cutting unemployment benefits to workers displaced during the pandemic could push people back to their jobs sooner but also take another slice out of an already reeling U.S. economy.

Democrats and Republicans are parrying over what to do now that the current arrangement will expire Friday. 

The newly unemployed have been able to get regular benefits plus $600 a week, a setup that allows 68% of those impacted to collect greater than 100% of their regular salary, according to recent numbers from the National Bureau of Economic Research. The median eligible income is 134% of normal pay, the NBER said.

Congressional Republicans say the extra pay has served as a detriment to getting workers back to their regular jobs. They have proposed taking the added bonus down to $200 a week and capping compensation at 70% of normal pay on a sliding scale that evolves over the next several months. Democrats are pushing back on that contention and are expected to propose keeping the current system, though possibly with some cap compared to pre-layoff compensation.

Economists largely agree that significant cutbacks in unemployment compensation would come with an economic hit of hundreds of billions of dollars to gross domestic product. That’s an important factor to consider as the U.S. fights its way out of a recession that began in February.

“While two-thirds of unemployed workers are receiving UI benefits greater than their prior wages, there is no evidence thus far that the feared negative effects of emergency UI have arisen: workers with higher UI wage replacement rates were just as likely to return to work in May and June as those with lower wage replacement rates,” Sarah Bianchi, head of U.S. public policy and political strategy research at Evercore ISI, said in a note.

Bianchi estimates that if the full added benefits were cut, that would shave 2% off GDP and actually lower employment by 1.7 million through reductions in demand due to lower salaries. 

In dollar terms for GDP, that would mean about $431 billion, using the first quarter as the baseline.

“Short-term there’s substantial risk that cutting emergency UI could yield little labor supply upside and significant aggregate demand downside,” Bianchi said.

In the real jobs market, though, there’s substantial disagreement over whether the added benefits serve as a disincentive.

Robert Maynard, CEO and founder of the Famous Toastery restaurant franchise, said he’s looking to add three new shops to his current fleet of 23 and is having a difficult time finding workers.

“We have locations we actually can’t even open,” he said in a phone interview. “The core people in our company came back. But that hourly employee who is making $500 a week who got that supplemental [insurance], they stayed home and they’re staying home.”

Some workers apply, interview and then never show up so they can “prove they are looking for a job” and still collect, Maynard added. To open up his new locations, he said he’d normally have 50 or 60 people hired by now but instead has just 15.

“Even stores currently open are having a tough time keeping staff,” he said.

Two Men and a Truck, a moving franchise, is experiencing similar issues, though the company’s chief talent officer, Sara Bennett, said she’s not sure if it’s related to the extra compensation or just the vagaries of the current market.

“We’ve definitely experienced significant challenges this year in hiring and retaining employees,” Bennett said. “It’s harder to find applicants now. Even when we do find applicants, it’s harder to get them to show up for an interview or harder to get them to show up for their first day of employment when we’ve made offers.”

In the realities of an election year, the likelihood that the added unemployment benefits go away completely is slim.

Most pundits see the GOP overture as a bargaining chip, with the final agreement somewhere in the middle as no party wants to be seen as cutting off a lifeline to workers in the middle of an unprecedented recession. After all, the benefits package came to be because of unemployment caused through no fault of the impacted businesses or workers but rather by a government-mandated economic seizure aimed at controlling the Covid-19 spread.

Greg Valliere, chief U.S. policy strategist at AGF Investments, sees “a cut in federal unemployment benefits to something like $300 weekly, falling from $600 now, on a sliding scale in the next few months — perhaps combined with a signing bonus for people who return to work.”

That would make the economic impact less severe and provide political cover for both parties with their respective bases.

In the case of a reduction to $300, the GDP impact would be just over 1%, or about $217.5 billion, and increase the unemployment rate by 0.5%, according to Mark Zandi, chief economist at Moody’s Analytics. In his worst-case scenario with no extended benefits, Zandi sees a GDP decline of 1.27% or $273 billion and a job loss of 1.13 million.

“Letting enhanced UI expire or even renew at a lower amount would be a meaningful hit to the economy,” he said. “The disincentives to work created by the large $600 in enhanced UI appear to be small, at least so far.”

Financial markets thus far have taken only spotty notice to the debate over the spending package.

However, the economy will come into stark view Thursday, when the government releases the second-quarter GDP number, a day before the extended benefits package expires. Economists surveyed by Dow Jones expect the reading to show that growth slumped 34.7% during the period, which would be the worst in recorded history for the U.S.

“The big risks for markets and the economy is Congress thinks the recovery has taken hold and it can pull back on support, where everybody else knows we need to stay vigilant and fight through this recession,” said Tom Garretson, senior portfolio strategist at RBC Wealth Management.

Still, the package will need to be the right mix between taking care of workers still displaced by the slow-moving economic reopening and the businesses looking to get workers back on the job.

“We’ve taken a pretty good lickin’ for the last two and a half months,” said Maynard, the Famous Toastery founder. “Things have come back a lot since then, but they’re not where they were. The noose gets tighter and tighter.”