Economists want to swap $600 unemployment boost with up to $400 a week

spike

Closed businesses on May 21, 2020, in Baltimore, Maryland.

(Photo by Salwan Georges/The Washington Post via Getty Images)

Lawmakers should replace a $600 unemployment supplement for jobless workers with a maximum $400 a week, according to a new proposal issued by a group of powerhouse economists. 

The proposal comes as Democrats and Republicans debate the merits of extending the $600 weekly enhancement to unemployment checks, which is scheduled to end after July 31.

Democrats want to extend the $600 checks past July to avoid a severe drop in household income at a time when unemployment is likely to remain elevated. Republicans want to end the payments outright or replace them with a back-to-work bonus that pays Americans to find new jobs.

The proposal, published Tuesday by the Aspen Institute, appears to assuage both parties.

The policy would continue weekly aid at a reduced amount. It would also offer a payroll subsidy, either via an extra tax credit or “hiring bonus,” to incentivize workers to rejoin the workforce.

The four authors ere: Jason Furman, former chair of the Council of Economic Advisors under President Obama; Timothy Geithner, former treasury secretary during the Obama administration; Glenn Hubbard, who chaired the Council of Economic Advisors under President George W. Bush; and Melissa Kearney, director of the Aspen Institute’s Economic Strategy Group.

The current $600-a-week federal supplement, created by the CARES Act, replaces more than 100% of lost wages for about two-thirds of American workers, according to economists at the University of Chicago.

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While the current supplement may encourage some workers to remain unemployed, ending federal aid after July would cause “hardship for tens of millions of households,” according to the new proposal.

It would also inflict greater damage to the economy due to a big drop in consumer spending, the authors said.

New unemployment policy

The new system would, like the current one, provide a weekly federal supplement on top of state-paid unemployment benefits.

The federal benefit would replace up to 40% of one’s prior wages. The benefit would be capped at $400 a week, and would be in addition to state jobless benefits.

Combined, workers who earn up to the median wage would replace about 80% to 90% of their previous earnings. That share would be less for higher earners.

States unable to implement this benefit formula by August could administer a flat $200 a week federal payment through the end of the year in its place.

The economists propose tying the amount and duration of unemployment aid to economic “triggers” like the unemployment rate.

The maximum federal benefit — $400 — would only be available when a state’s unemployment rate exceeds 15%. It would phase out entirely after falling below about 7%.

Most states currently have an unemployment rate less than 15%, the economists said.

Payroll subsidies

In addition, the proposal aims to reduce any labor-market “distortion” that may be caused by rich unemployment benefits by offering payroll subsidies to encourage Americans to seek out reemployment.

One approach would pay a “hiring bonus” to unemployed workers who get jobs.

Another is a tax credit — the Pandemic Earned Income Tax Credit — that would double a family’s refundable earned-income tax credit, as based on earnings in the 2020 tax year.

The cost of the overall proposal, whose recommendations also touch on areas like small-business loans and relief for state and local governments, would be “considerable,” ranging from $1 trillion to about $2 trillion depending on the scope and duration of the recession, according to the authors.

While federal relief has already been substantial, more is necessary to boost the economy, increase jobs and reduce the unemployment rate, they said.

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