Covid-19 is an unprecedented health crisis. It is also emerging as an unprecedented economic crisis. On July 30, the US government reported the worst three-month drop in economic activity on record: a 9.5 percent decline in gross domestic product during 2020’s second quarter. Efforts to curb the coronavirus’ spread have shuttered US businesses and tossed more than 16.6 million people out of work.
But as extraordinary as the pandemic might be, the arguments over how the government should respond to such massive job losses are familiar, rehashing a longstanding debate over unemployment insurance, the state-federal partnership that provides payments to Americans who have lost their jobs: Does paying benefits to idled workers discourage them from finding new jobs?
Till von Wachter, an economist at the University of California, Los Angeles, is faculty director of the California Policy Lab, which partners with the state’s policymakers to address social problems like poverty and crime. Von Wachter’s work focuses on the myriad consequences of job loss — people losing existing work through no fault of their own — and on the ways recessions affect new workers trying to break into the labor force. In 2016, he coauthored a review of studies examining the effects of unemployment insurance benefits in the Annual Review of Economics. As he sees it, there’s an essential role for unemployment insurance, and other government efforts to alleviate economic woes, in these troubled times.
Knowable spoke with von Wachter, who was working from home during the pandemic, in mid-July — just as Congress and the White House were debating the details of a new coronavirus relief package, expected to exceed $1 trillion.
This interview has been edited for length and clarity.
Obviously unemployment has profound impacts on the people who have lost their jobs. Why do economists worry about it in the broader sense?
Unemployment worries economists for a couple of reasons. A sudden loss of income is not good for the individual, but it’s also not good for society. You have a lot of workers cutting back on buying things at the same time as they are no longer generating the goods and services that other people consume, potentially leading to a vicious cycle. There’s also a concern that if people stay out of work too long, they become less employable, which impacts the overall economy’s productive potential.
We also worry that people who are out of work will make short-term decisions that are damaging over the long run. People don’t want to starve or end up on the streets, so they shift spending to pay their bills. They could stop maintaining their health. They could stop investing in their children’s future. We see this often in developing countries that don’t have an unemployment insurance system.
So the goal of unemployment insurance is to prevent that sort of short-term decision-making?
That’s one goal. Unemployment insurance was instituted in the US during the 1930s, as part of Social Security and the New Deal. It’s a state-federal partnership. States set the parameters of the program, such as the scope and duration of benefits, and the tax rates that businesses will pay on their workers. The federal government comes in to help when states can’t keep up during a recession — which is something that has happened in each recession in recent memory.
So, yes: The program protects workers from income loss, and prevents them from cutting back on education expenses and so on. But it’s also meant to keep displaced employees afloat long enough to find another job in a similar vein of work — to prevent a bunch of engineers or editors or other skilled people from ending up serving coffee, just to make ends meet. Taking such jobs can hurt a worker’s chances of returning to a higher-paying, skilled position later on.
Unemployment insurance is also supposed to provide the economy with spending when it’s most needed. It allows people to keep paying their rent and doing their shopping. This spending helps to provide stimulus to the larger economy when it is most needed.
So how would you characterize the unemployment triggered by the pandemic?
There has been nothing like this, really, other than the Great Depression. In California, for example, between a third to half of workers in the labor force have filed for unemployment benefits, depending on which group you look at. That’s one of every two or three workers. Not all of them will receive benefits, or wind up in the official count, but if you take applications as a signal of need, certainly a very large number of people have been affected.
This has been an incredibly concerning and interesting period for those of us who study the unemployment insurance system. It’s been really hard to figure out how to modify unemployment payments quickly enough to respond to the Covid-19 crisis.
Why is it so difficult?
In every recession, there’s a classic debate over the federal government contributions that extend benefits duration.
Some economists and policymakers worry that at some point payments like these do more harm than good, because they may prevent people from returning to work. There have been a lot of studies about this. Most find that there is some temporary reduction in employment caused by insurance extensions, but that the cost is relatively small compared to the upside for workers and the economy.
In the Covid recession, as you know, there has been an extension of benefits of $600 per week that pays many low-wage workers higher weekly earnings than they had before. It was a quick fix to get money to people. But it makes many observers uncomfortable. Does the extra $600 cause people not to work? Or are people not working because they’re unable to find jobs?
It’s an interesting political question that could be directly informed by data, but the data are just coming in. We have a partnership here in California that lets us see information on unemployment insurance claims and benefits in close to real time. We’ve been learning a lot about who’s filing for benefits, including noting an important rise in additional claims filed by people who were laid off, filed claims, and then were laid off again. These claims have gone up as coronavirus surged in June and July. Also, we’ve found that a substantial fraction of individuals are working and receiving partial unemployment insurance, which is an interesting indicator of potential employment trends. Businesses may be hiring on a part-time basis, out of caution. We’re using these data to calculate the likely effects of different policies.
In almost all other states, economists will have to wait months, if not years, to analyze such data. We could inform policy in a much better way if the US data from the unemployment insurance system were more available.
Is the debate in Congress only about the $600 payments?
The federal government is considering various ways of modifying the states’ programs, including supporting underutilized work-sharing programs [subsidized furloughs that prevent layoffs] or extending deadlines to funnel more money to small business via the Paycheck Protection Program [the federal program that pays companies to keep employees on payrolls during the coronavirus crisis]. But unemployment insurance is extremely cumbersome to reform, because you have to get 50 states to go along, and some have out-of-date IT systems that make that almost impossible.
I think Congress would like to modify the $600 benefit to something more sensible, such as raising the benefit replacement rate. Currently, in most states the rate of these benefits replaces only half of a worker’s prior earnings. But states might be very slow to respond to anything more complex.
What happens as the $600 payments expire?
It is hard to know for sure without good data on family income. But pandemic-related job losses have affected a disproportionate number of low-wage workers. Certainly, if unemployment insurance income represented all a family earned, many people would fall below the poverty line without that key lifeline, lacking the money to pay for basic needs such as housing, food and transportation. We might be in for an eviction crisis if the stalemate in DC continues.
So what should leaders do?
In addition to continuing unemployment payments in some form, it is important to keep curbing the spread of the virus, while making the delivery and consumption of goods and services safer. This would help consumer demand while making jobs for low-income workers safe.
This can be done by setting safety standards that would allow the economy to better reconvene on a new equilibrium, helping prevent infections and supporting a sustainable reopening.
For instance, there have been ongoing discussions about worker-safety regulations in delivery businesses, large warehouses, agriculture and meat-packing plants. Some supermarkets have plastic barriers for cashiers; some restaurants in Europe have plexiglass boxes around dining tables. These are problems that can be solved, with the right amount of support for businesses and some setting of expectations of what is the right thing to do. I think some states are trying, but I don’t see it happening at the federal level.
What is work sharing, and why do you promote it as an important tool for managing unemployment benefits during the Covid-19 crisis?
Work sharing, which is also known as short-time compensation, offers incentives to companies to reduce worker hours instead of implementing large-scale layoffs in response to a crisis like Covid-19. This helps keep workers attached to their employers, effectively putting the workforce on standby until conditions improve. It’s common in Europe, so many have questioned why it hasn’t been used as widely here in the US.
Both Democrats and Republicans backed short-time compensation in the aftermath of the Great Recession, and passed a bill that subsidizes work-sharing programs in the US today. But take-up by employers has been relatively low, and I and other academic economists are lobbying Congress to provide more nimble, federally backed alternatives that would kick in during emergencies. The hope is to prevent the fraying of relationships between workers and firms and have more money in workers’ pockets at the end of the day.
Companies benefit because they avoid the costs of massive turnover and training; and workers who retain their jobs keep their health insurance, and don’t risk suffering the kinds of lifetime earnings losses and health impacts experienced by those who lose a job. Those can be notable: In one study, we found that Pennsylvania workers who lost jobs during the 1982 recession in the US lost one to 1.5 years of life expectancy, on average.
Recessions have similar effects on would-be workers looking for their first jobs, too. We found life expectancy among people who entered the job market during the 1982 recession was reduced by six to nine months.
So the pandemic could have a particularly harmful effect on young people just entering the workforce?
Yes. Research has long shown that in a recession, the youngest workers, with no job experience, suffer large initial losses in earnings and employment. They tend to recover, but it takes 10 to 15 years: a few years for the better jobs to become available, a few years to search for those jobs and a few years to work your way up the ladder in that job.
And even though the initial economic effect fades, there’s a decline in health and a rise in mortality as these unlucky young workers enter middle age. It seems to be that young workers with lower income have worse health behaviors — they drink more, have lower self-esteem and have more complicated lives marked by earlier marriage, fewer children and higher rates of divorce. The harms accumulate and express themselves in lower health outcomes.
Could the Covid-19 crisis cause a depression? And, what is a depression?
There is a clear definition for a recession, related to a drop in economic growth. I don’t think there’s a similar definition for a depression. You could think of it as an economic slowdown with great intensity and long duration. A sharp downturn with a quick rebound would probably not be called a depression — and there’s still hope that we could rebound quickly from this crisis.
The Federal Reserve predicts we will be in a recession until at least until mid-2021, and usually labor markets take longer to recover. But I don’t think we have entered a phase of inevitability. We’ve found that 60 percent to 65 percent of people who apply for unemployment insurance in California believe they’ll be recalled by their companies, and the numbers are similar nationwide. That is lower than at the start of a crisis, but at least a good sign.