The Coranavirus Aid, Relief, and Economic Security (CARES) Act expansion of Unemployment Insurance (UI) benefits is likely to cost far more than Congress’s original estimate of $260 billion, due to an unprecedented rise in layoffs. However, that is a feature, not a bug, of the UI provision—its spending is designed to grow automatically in the face of increased need.
The CARES Act expanded eligibility for UI benefits to many previously uncovered workers (such as the self-employed, independent contractors, and gig economy workers) through the end of the year. It also extended unemployment benefits—which expire after 26 weeks in most states—for an additional 13 weeks. And it increased most UI payments by $600 per week through July 31.
Those changes will help support many of those who have lost jobs in the pandemic. For example, in the fourth quarter of 2019 the average weekly UI benefit was less than $380, roughly 40 percent of wages on average. Thus, the $600 supplement will raise benefits to close to usual weekly earnings for many workers. For some, total UI benefits will be even more generous than their pre-layoff earnings.
The enhanced benefits will be costly, however. When Congress was considering the legislation, it estimated the UI provisions would cost about $260 billion—though it acknowledged the price tag would depend on the unemployment rate. While we don’t know what unemployment rate Congress assumed when it passed the law, the true cost is likely to be higher.
The Labor Dept. estimated February’s unemployment rate at 3.5 percent, with total nonfarm employment of 152 million. In the three weeks since Congress passed the CARES Act, amid widespread stay-at-home orders and business shutdowns, new claims for unemployment benefits have totaled almost 17 million. By itself, that would raise the unemployment rate by about 11 percentage points. That number would be offset by new hiring over the period, but even in the unlikely event that hiring over that period was consistent with recent history it would reduce the rise by only about a half a percentage point, implying an unemployment rate of about 14 percent—the highest since the Great Depression. Many UI applicants have been stymied by overwhelmed state unemployment departments and web sites, so the true total is probably higher, and millions more are likely to apply in the coming weeks.
Congress surely anticipated a substantial boost in unemployment, but the scale of the increase is likely far greater than was expected in developing cost estimates. On April 2, the Congressional Budget Office sketched out an updated economic forecast, which it used to estimate the cost of unemployment provisions in a previous relief bill.
That forecast assumed an unemployment rate of 12 percent for the second quarter, but it was released the same day as last week’s news on jobless claims. Thus, it could not have fully incorporated all of the 17 million newly filed claims. And, unfortunately, more bad news is probably on the way. As CBO’s update put it even last week, recent economic news “has been more negative than anticipated."
All of this indicates that the ultimate cost of the expansion of UI in the CARES Act will likely far exceed $260 billion. But that doesn’t indicate any flaw in the program’s design. Quite the contrary, a highly desirable feature of the UI program is that it expands automatically if the economic picture is more dire than anticipated. (On the flip side, in the unlikely event of a quick and full recovery, the provision would cost less than anticipated). By contrast, the CARES Act’s $1,200 rebate payments to individuals ($2,400 for married couples and $500 for each child under age 17), which have received more attention, are fixed regardless of economic conditions. Moreover, those payments are not as well targeted to those impacted by the pandemic and associated economic contraction as the UI expansion.
Policymakers in both parties have begun calling for a new round of coronavirus relief legislation. As they consider what options to include in future legislation, they would do well to keep in mind the value of provisions that adjust automatically to rapidly evolving—and hugely uncertain—economic circumstances.
