Arguably the most important economic measure the United States has undertaken during the coronavirus pandemic goes by the unassuming title, “Federal Pandemic Unemployment Compensation” (FPUC).
FPUC is hardly a household term, but the policy it refers to has become common knowledge in a country with a 13.3 percent unemployment rate: an extra $600 per week added to every unemployment check received by jobless people during the pandemic.
It is no exaggeration to say that FPUC is the main force keeping our mass unemployment crisis from becoming a humanitarian disaster. There’s only one problem: FPUC is set to expire at the end of July. And given that there is concern from the program’s skeptics in the Republican Party that such a generous unemployment check will deter people from returning to work, the chances of the program being renewed are pretty slim.
Enter a new idea from Ioana Marinescu, an economics professor at the University of Pennsylvania. She thinks letting the program lapse would be a big mistake. But she’s also sensitive to concerns that enhanced unemployment benefits can deter people from going back to work. So she has a bold idea for reforming PUA: converting it into a basic income-type program for people who’ve lost their jobs. Such a change would support workers who’ve lost jobs, pump more stimulus into the economy, and mitigate some of the work-disincentive effects of the bulked-up UI program — all for a pretty manageable sum of $237 billion.
But before we dive into her idea, let’s back up.
How emergency UI benefits work
On March 18, Congress passed a bill offering $1 billion to states to help them sort through the historic surge in unemployment. The centerpiece of the new plan is a $600-per-week across-the-board increase in unemployment benefits for all workers claiming them. Given that as of January the average UI check was $385 per week, this is a massive increase.
A recent paper by economists Peter Ganong, Pascal Noel, and Joseph Vavra found that the average UI recipient is getting 134 percent of their previous salary; “two-thirds of UI eligible workers can receive benefits which exceed lost earnings and one-fifth can receive benefits at least double lost earnings.”
The program seems to have had a tremendous impact. In April, personal income (defined as the money Americans receive from wages, government benefits, investments, and so on) grew by 10.5 percent, by far the highest monthly growth rate in the metric’s 60-year history, even as unemployment shot up from 4.4 percent to 14.7 percent that same month. That’s largely attributable to FPUC (and stimulus checks) boosting unemployed people’s incomes even as jobs disappeared.
But FPUC is set to expire at the end of July. And Senate Majority Leader Mitch McConnell has pledged not to renew the program in its present form. Meanwhile, some Senate Republicans are more sympathetic to extending it in a modified form, but the July congressional recess greatly limits the time Congress has to put together a replacement.
Marinescu’s paper sketches out a new policy that would transition us from the FPUC toward something resembling a basic income program. The UPenn economist is an expert on the economics of cash transfer programs and particularly on the question of whether people will stop working if they get cash with no strings attached.
In 2017, she conducted a wide-ranging review of the literature on unconditional cash programs for the Roosevelt Institute, focusing on programs in the US and Canada. She concluded there was little reason to believe basic income or negative income tax programs discouraged people from working. She and Damon Jones, an economist at the University of Chicago, also conducted the first rigorous study of Alaska’s basic income program, funded from oil money. Their conclusion, again, was that the payments didn’t deter work.
But Marinescu has also studied the effect of unemployment benefits on work. The standard conservative worry is that UI deters people from going back to work for two reasons: returning to work means losing unemployment benefits, and the benefits also give people money to live on that enables them to afford a longer wait for a job. The latter is known as the “liquidity effect.” The latest research cited by Marinescu finds that on average a 10 percent increase in unemployment benefits’ generosity leads to 5 percent longer spells of unemployment.
Recessions, however, are different. Marinescu’s past research has found that during the Great Recession, increased benefits reduced the number of people applying for jobs while the number of job vacancies stayed the same. That means that people had less competition for jobs they applied for and substantially reduced the effect of UI on employment.
Another paper by economists Gabriel Chodorow-Reich, John Coglianese, and Loukas Karabarbounis found that increasing benefits during the Great Recession had a minimal effect on unemployment, raising the rate by at most 0.3 points and possibly reducing unemployment by as much as 0.5 points by stimulating the economy, all while helping unemployed people survive.
How to increase the stimulative impact with a quasi-basic income
So unemployment insurance doesn’t usually have a large effect during recessions. But Marinescu actually wants it to have a positive effect — on the positive side. So she proposes a “job losers allowance”: converting the $600/week unemployment boost to a $600/week cash benefit for all unemployed workers that lasts for four months, whether or not the person in question gets a job during that time or not. This would cost about 40 percent more than the existing program.
This eliminates a major reason why unemployment insurance can increase unemployment, by eliminating the perverse incentive created by losing benefits when you get a new job. People who get a new job would get the benefit, too. That leaves the “liquidity effect” of fewer people seeking jobs because the benefit gives them money to live on.
This change, Marinescu estimates, would dramatically increase the stimulative impact of the program relative to the existing unemployment insurance policy, pumping $55.28 billion in stimulus into the private economy. It would also enable an additional 1.2 million people who lost their jobs to return to work within four months who would otherwise remain unemployed under the current unemployment assistance scheme.
This program might be a hard sell for McConnell, but some Republicans seem interested. Sen. Rob Portman (R-OH) has proposed a “re-employment bonus” program where people currently getting pandemic UI would get $450 per week in benefits if they get hired before the program expires at the end of July, so there isn’t as bad of a drop-off in benefits.
“A re-employment bonus is less generous in its amount and is conditional, so the effect on both stimulus and employment is likely to be lower,” Marinescu told me. But, she adds, “If Republicans are willing to go for a re-employment bonus, my solution would be a compromise that would also appeal to Democrats.
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