The American unemployment system was never designed for this.
The United States spends less on benefits for those not working compared to its rich-country peers and has fewer protections against layoffs and firings. The bargain is supposed to be that when new business creation and hiring (and firing) is easier, the overall employment level will be higher and unemployment rates will be lower. This arrangement was always dependent on the economy running hot to generate substantial wage growth, and amid the pain of its collapse in the crisis, there are hints that a new model for American labor may emerge in its place.
The pandemic has caused a double crisis. The economy’s ability to produce has been crippled by the virus itself with knock-on effects on demand for pretty much every good or service besides shelf-stable groceries and video-chat software. In the last week alone, over 5.2 million people filed for unemployment, a figure for which the only source of optimism was that it was slightly lower than the week before. The unemployment rate may be as high as 16%, which would be the highest of the postwar era and well north of its 9.9% peak in 2009.
The federal and state governments have trained a firehose of cash on the raging inferno of a labor market. There are efforts at both ends of the employer-employee relationship to both maintain worker incomes and the bare existence of businesses themselves. The government is offering smaller businesses generous loans that can be forgiven, paying unemployed workers $2,400 a month in addition to their usual unemployment, and paying out $1,200 stimulus payments (with a bonus for children). The Federal Reserve and Treasury have a program for bigger firms as well.
The government is now taking responsibility for maintaining worker income directly onto its swelling balance sheet, in what could herald a transformation of Washington’s role in compensating and allocating labor.
“The pandemic unemployment assistance is available to folks who are not eligible under precrisis state rules. That includes the self-employed and independent contractors who don’t have hours and earnings history and who don’t have sufficient history,” Ryan Nunn, a fellow at the Brookings Institution, said.
In 2018, according to the Congressional Budget Office, the federal government spent $29 billion on unemployment and $285 billion total on income-support programs, which also include food stamps, tax credits, and Supplemental Security Income. Now, it will spend over $200 billion just on bumped-up unemployment checks, the expanded eligibility, and a longer benefits period. The Paycheck Protection Program has already exhausted its nearly $350 billion authorization for loans to small businesses—three-quarters of which are supposed to go to payroll expenses—and the administration is asking for $250 billion more.
The Cares Act is temporary, but the jobs crisis probably won’t be. We don’t know what the rescue package’s effects will be, but without it, the CBO projected the unemployment rate to be 10% by the end of 2021. If the Cares Act lapses, the return to the previous system will be jarring. Typically only a portion of workers who are eligible sign up, let alone those who are outside the system entirely, and there are wide state-by-state variations in the programs’ administration and generosity.
If you want to see what a precrisis labor model can look like under its most extreme conditions, look at Florida. The state overhauled its system under former Gov. Rick Scott to make benefits harder to access and easier to lose. Out-of-work Floridians before the Cares Act could expect to collect up to a maximum of $275 a week for only 12 weeks (when the unemployment rate is below 5%). The average benefit nationally is $387 and programs typically run for 26 weeks.
Scott largely achieved his goal of lowering the unemployment taxes businesses pay. But surging claims overwhelmed the system following onset of the virus. Just over 1% of Florida’s labor force was receiving unemployment insurance as of the end of March. That’s the lowest rate in the country, compared to 8.2% in Georgia, 3.6% in South Carolina, and 6.2% in California.
The United States as a whole lags rich countries in all types of labor-market policies. Its spending on unemployment benefits is well below the OECD average, and its total spending on labor markets is the second lowest of the group. But this is already changing. The projected unemployment spending alone following the Cares Act would be over 1% of 2019’s GDP, putting the U.S. above the OECD average in a normal year.
European labor markets also tend to be more explicitly organized than American ones. In Denmark, which spends about 3% of GDP on its labor market policies (which include training as well as benefits), huge swathes of workplace policy are arrived at through the so-called tripartite agreement between the state, unions, and employers, while wages are arrived at through collective bargaining. Large portions of the German workforce determine their wages through collective bargaining, and unions often have a managerial role at the company level. This has made it easier to negotiate and implement expansive responses to the epidemic and economic shock.
The United States may be groping toward a European model. Either through business loans or expanded unemployment benefits, the federal government will be picking up the wage tab for tens of millions of workers. The Cares Act may also be encouraging firms to furlough workers who can, especially at the low end, earn as much or even more as they did before on unemployment.
The former Obama administration economist Jason Furmanhas suggested that mass furloughs that come with substantial unemployment benefits may be even more effective than European wage subsidies. They reduce the employer cost substantially while still maintaining a connection between employer and employee, might otherwise be severed entirely as workers get laid off.
Macy’s has furloughed tens of thousands of workers, while furloughed Disney employees may get automatically enrolled in Florida’s unemployment system to get its workers benefits. In some unionized segments of the economy, like digital media, workers’ representatives have pushed for pay cuts in order to decrease or eliminate the need for layoffs.
What’s missing from the government’s direct efforts to keep workers on payrolls or replace their wages with benefits is the final pillar in more extensive unemployment programs—not just employment protections and high benefits, but support for the unemployed to help them work again. The United States is now offering generous temporary benefits and near-complete wage subsidies to some workers, but the labor market of a partially re-opened, postpeak economy will not be the same as the one we had before.
There will have to be substantial re-allocation of labor. Busboys may become cleaners, bartenders could become Amazon warehouse workers, and someone is going to have to test and trace tens of millions of people. Some sectors of the economy, like cruises and airlines, may not be facing a severe, temporary shock, but a long-term reduction in their capacity.
The labor market will be creaky at best, and the government might have to find a new role for itself in making it work. The Cares Act may be temporary; hopefully the crisis is, too. But if in the future Americans find themselves in a tighter relationship with the government in how they’re hired, fired, trained, and compensated while working or while unemployed, it will have started here.
Matthew Zeitlin is an economics journalist in New York.