As Congress prepared to pass its $2 trillion coronavirus stimulus last week, a trio of Republican senators sounded an alarm, claiming that the bill’s ultra-generous unemployment insurance could let many Americans quit essential jobs.
The 11th-hour objection by Sens. Lindsey Graham (S.C.), Tim Scott (S.C.), and Ben Sasse (Neb.) attracted derision and outrage, but the scenario they feared may be playing out. Some small business owners say their employees are resigning in part to collect generous unemployment benefits.
Daniel Johnson, the owner of a New Orleans landscaping construction company, told the Washington Free Beacon that while he runs a business deemed essential, most of his team has stopped showing up because of the coronavirus, preferring to wait on unemployment payouts.
“The majority of my team’s last day was 3/13,” Johnson told the Free Beacon. “We have plenty of work and the city deems us as an essential business because we are a city contractor working on green infrastructure projects.”
“The employees expressed concern for several reasons,” Johnson said. “Most focused on fear of bringing virus home to weak family members young and old. I get it, but our work allows them to have substantial space between each other. Most are desperately waiting for unemployment benefits and are not interested in returning to work anytime soon. Very frustrating as an employer.”
In the face of a pandemic, the government has urged people to stay home, gutting large and small businesses alike. While mass unemployment may keep people physically safe in the short run, the widespread use of unemployment insurance runs the risk that businesses may lose out on government loans guaranteeing their payrolls and could erode employer-employee connections that stop businesses from buckling. That could convert a short, sharp corona-recession into a dragged-out economic depression.
Prior to the CARES Act’s passage, Sasse, Scott, and Graham warned that the bill might contain what they called a “life-threatening drafting error,” which they said introduced “a strong incentive for employees to be laid off instead of going to work.” They objected to the act’s unemployment insurance provisions, which ordered states to waive many eligibility requirements and put the federal government on the hook for a larger portion of payment obligations.
That added spending includes a flat $600 per person per week for four months—the equivalent of a guaranteed $15 per hour full-time wage, not counting other unemployment payments or the $1200-per-person cash advance also in the bill. This, the senators feared, would lead essential workers to walk off their jobs just as they were most needed.
There is growing evidence that may be playing out. In fact, some small businesses are telling customers that their laid-off employees will fare better if they’re laid off. In an email to customers, a cleaning service in Alexandria, Va., wrote that its two-week closure would actually benefit employees: “With the generous Federal supplement added to state unemployment benefits, not to mention the federal stipend, most of our cleaners and many of our office workers will actually fair [sic] better with a temporary layoff than they have thus far this year.”
Stories like Johnson’s or the cleaning service’s reflect the past week’s shocking job market data. Figures released Thursday showed that 6.6 million Americans had filed for unemployment insurance over the preceding week. That number blew past all previous records, including the 3.3 million filings the week before. It also eclipsed the consensus projection of about 3.7 million filings.
The loss of 10 million jobs in two weeks is doubtless driven by cascading effects of the coronavirus, including the shutdown of nonessential businesses in many states. But the cushion introduced by the equivalent of a $15-$20 hourly wage from the government is likely not helping.
“Government policy—especially the generous extended unemployment benefits Congress passed last month—has potentially lit a match under already combustible conditions,” Karl Smith, vice president for federal policy at the Tax Foundation, wrote Thursday.
Contrary to claims that the bill’s unemployment provisions would not apply to individuals who willingly quit their jobs, Smith explained that the CARES Act provides benefits for any person who self-certifies that he left his job “as a direct result of COVID-19.” Because the current wave of unemployment is almost all coronavirus-related, there are few people who could not judge themselves eligible.
There are upsides to mass unemployment during a pandemic: Fewer people going to work means fewer vectors for disease. But it could have dramatic economic consequences down the road.
Wall Street firms are unanimous in their view that the United States is entering a recession. They are still debating whether that recession will be “v-shaped”—a short, sharp drop followed by a short, sharp increase—or shaped more like a “u” or “l”—sharp drops followed by slow or no recovery. Samuel Hammond, director of poverty and welfare policy studies at the Niskanen Center, wrote Thursday that the unemployment incentivized by the CARES Act makes the latter more likely.
“Maintaining a formal relationship between employers and their employees, even if they’re furloughed, will be key to ensuring a robust economic rebound,” Hammond wrote. “If those relationships are broken, businesses won’t spontaneously raise wages. Rather, they will either close shop or restructure around business models where that labor isn’t demanded in the first place.”
An alternative approach is to keep employees technically on payroll but send them home, while the government picks up the costs of continuing to employ them. This is the idea behind Denmark’s offer to pay 75 percent of companies’ wage costs. It’s also the premise of the CARES Act’s $350 billion paycheck protection program (PPP), which promises small businesses loans that will be forgiven if they are used to cover payroll costs.
PPP loans’ forgivability, however, is dependent on employees remaining on payroll. If employees resign to seek more money through unemployment, then struggling small business owners will be left with loans they cannot repay.
This could spell economic disaster. A U.S. Chamber of Commerce survey released Friday found that one in four small businesses say they are two months or less away from closing permanently. Such mass closures would almost certainly mean a long, hard economic recovery, a double blow to a country already fighting a deadly disease.