Eakinomics: Market Forces Return

Eakinomics: Market Forces Return The core strategy in the Coronavirus Aid, Relief, and Economic Security (CARES) Act is to provide firms and individuals bridge financing to survive the peak arrival of the coronavirus. This financing takes the form of the Paycheck Protection Program (PPP) for smaller firms and Treasury-backed, Federal Reserve lending facilities for larger firms. For individuals, it consists of checks and the pandemic unemployment provisions. An important feature of the CARES provisions is the absence of any apparent consideration of economic incentives. The notion is evidently to put the economy in deep freeze and then restart. Unfortunately, it is not working out that way. As has been widely noted, Georgia and Alaska have resumed commercial operations, and numerous other states are following suit. As Eakinomics previously noted, this reopening raises some real concerns about the labor market. Specifically, the enhanced unemployment insurance (UI) benefits include a $600 per week federal supplement to the state unemployment insurance benefit until the end of July. That is, workers will receive the normal unemployment benefit (for up to 39 weeks) plus an additional benefit of $600 in cash. This means that many workers will make more money on UI than on their job. If you open the economy in May, will those workers go back to work? That’s a fine question in the abstract. But it is even better to have some idea of the magnitudes involved. Fortunately, AAF’s Isabel Soto has run the numbers. As Eakinomics feared, the maximum unemployment benefit is greater than the median wage in the majority of states. As a result, as many as 64 million workers make below the maximum weekly unemployment benefit. Among them, nearly 3 million such workers in 10 states could be able to return to work in the next week. What can be done? Clearly, the easiest path forward is to let the federal supplemental benefit expire. But that does not solve the problem between now and then. One possibility is to follow the lead of Georgia. Soto notes that the state has “issued an emergency rule that allows workers who make $300 a week or less to continue receiving unemployment benefits. This rule would affect less than 10 percent of the state labor force but enables low-wage employees to return to work without seeing a drastic drop in their earnings.” Looking past the peak of the pandemic, there will be a premium placed on pro-growth policies. Labor market incentives to stay home simply do not meet that need.