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Economic Analysis: Massive Federal Programs Poised to Counter Skyrocketing Unemployment

Posted on Apr. 6, 2020

On April 2 the Department of Labor reported jobless claims for the week ending March 28 were 6.648 million. This previously unimaginable number followed the prior week’s figure of 3.341 million. With nearly an extra 10 million Americans unemployed from a workforce of 164.5 million, U.S. unemployment is set to jump from 3.6 percent to 9.6 percent.

Although we can — and we will — criticize the details, our lawmakers in Washington deserve high praise for promptly enacting five major programs that directly address distress caused by unemployment. Three of these programs offer incentives for employers to keep employees on the payroll. Two of them cushion the blow to workers who have lost their jobs or otherwise must remain at home. The figure below provides a visual overview of COVID-19 relief programs.

Coronavirus Legislation Cash Flow Effects, Fiscal 2020 and 2021

Calculations presented below suggest that at least 40 percent of the U.S. workforce could be directly affected by these provisions.

Maintaining Workforce

Paycheck Protection Program

Small and midsize businesses (generally with fewer than 500 employees) and nonprofit organizations can borrow up to 2.5 times their monthly payroll or $10 million (whichever is less) under the Paycheck Protection Program administered by the Small Business Administration. Eligible employers apply at their local banks. The big news here is that if payroll levels are maintained, the loan is forgiven — that is, the loan becomes a grant.

The program is expected to disburse $364 billion. If all employees of qualified employers earned $50,000, the maximum loan amount would be $10,417 per employee. That implies employers with a total of 35 million employees would benefit. That would be 21 percent of the U.S. workforce. If average wages of employers using the program are lower, the implied number of affected employees would be larger.

Employee Retention Tax Credit

The employee retention tax credit (ERTC) generally provides a refundable payroll tax credit of $5,000 per employee for qualified employers. Qualified employers are businesses of any size that have been closed under official orders or that have experienced a sales revenue decline of 50 percent. For businesses with 100 or more employees, credits are available only for employees who aren’t providing services to employers. Importantly, the ERTC is not available to businesses participating in the Paycheck Protection Program. And employees whose wages are used in computing the work opportunity tax credit cannot be included in the calculation of the ERTC.

The Joint Committee on Taxation estimates the credit will reduce federal taxes by $55 billion. The estimates imply that if businesses receive a $5,000 credit per employee, employers with a total of 11 million employees will benefit. That would be 6.7 percent of the U.S. workforce.

Large Employer Loans

Businesses too large for the Paycheck Protection Program may qualify for $500 billion in lending under Treasury control using its Exchange Stabilization Fund. Among other conditions for qualification for these loans (including no dividend payouts, no stock buybacks, and no excessive executive compensation), employers must meet minimum payroll maintenance requirements. Unlike Paycheck Protection Program loans, these loans are not forgivable. The amounts that any one business may borrow are not specified in the legislation. Treasury has broad discretionary powers.

Cushioning the Blow

Expanded Jobless Benefits

Senate Minority Leader Charles E. Schumer, D-N.Y., calls it “unemployment on steroids,” and that is a good description. Similar to congressional action in prior recessions, the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) funds an additional 13 weeks of unemployment benefits (section 2017). Most states provide 26 weeks. Also, federal funds are provided for extending eligibility for workers who do not usually qualify for unemployment, most notably for the self-employed, who can now collect unemployment for 39 weeks (section 2102). Finally, funding is provided for all unemployment recipients to receive an additional $600 per week through July 31. This is in addition to regular unemployment benefits, which on average were $385 per week in January 2020. But there is wide variation on average across states. Depending on prior pay and generosity of existing state benefits, many unemployed workers’ unemployment compensation will exceed their prior pay.

Calculations (available from the author) suggest that on average, the federal government will be providing about $12,000 of benefit per uninsured individual. With an estimated outlay of $250 billion, this implies about 20 million unemployed workers will be covered by these expanded unemployment insurance benefits. That is about 12 percent of the U.S. workforce. As noted in the opening paragraph, we are fast approaching those levels.

Paid Sick Leave

The Families First Coronavirus Response Act (P.L. 116-127) provides refundable payroll tax credits to wholly compensate employers with fewer than 500 employees that are now required to provide paid sick leave and family leave to employees who face various crisis-related hardships at home. The maximum required paid sick leave is either $511 or $200 per day for 10 days. And following that is possible paid family leave for an additional 50 days at $200 per day. Taking all this into account, the maximum benefit is $15,110. The JCT estimates the tax saving for businesses would be $105 billion. If all eligible employees received the maximum benefit, the implied coverage would be about 7 million workers or 4.3 percent of the workforce. Most eligible workers will probably receive considerably less than the maximum. This would increase the implied number of workers who would benefit.

Driving With Two Feet

Consistent with our economic policy goal of stimulating the economy, we now have three major programs encouraging employment. Consistent with our health policy goal of maintaining social distance, we have two other programs that encourage employees to stay at home. Before moving on to “phase 4” legislation, we should probably sort out the strengths and weaknesses of phases 2 and 3.

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