The United States is facing an imminent surge in unemployment insurance claims that threatens to completely swamp the system for claiming and paying benefits.
The surge is so unprecedented in historical terms that it essentially defies efforts to forecast where the economy may go in the future, and underscores the extent to which the looming coronavirus recession is completely different in its mechanics from the 2008 Great Recession but potentially even more severe in its impact.
In Pennsylvania, for example, reports from the state’s Department of Labor and Industry suggest that they’ll see at least 121,000 new unemployment claims this week. By contrast, there were about 281,000 new claims across the entire country last week, which itself was a rise from the previous week’s level of 211,000 claims.
The Trump administration was so alarmed by the dribs and drabs of data leaking out from state agencies that it’s asked states to stop talking about the claims they are seeing until the full federal report comes out on Thursday. Meanwhile, a Goldman Sachs research note by David Choi projects based on what’s already leaked out that new claims will reach 2.25 million when that report is finalized — a number that completely shatters all records.
We’re in uncharted territory
Here’s a chart of weekly initial unemployment claims dating all the way back to 1967 compared with the Goldman Sachs estimate of 2.25 million — a spike so large that if it comes to pass will ruin the scaling of future unemployment claims charts. Below is an adaptation of a chart by Andy Kiersz of Business Insider:
That doesn’t necessarily mean that aggregate unemployment will reach unprecedented territory. In a separate analysis, Goldman’s Jan Hatzius estimates that unemployment will peak at around 9 percent — in part because he’s counting on a significant fiscal stimulus — which would be very bad but still somewhat lower than the peaks reached in October 2009 or December 1982.
Nevertheless, the fact that we have never seen an increase in unemployment as rapid as the one we seem to be facing means that all our efforts to predict what will happen next are largely guesswork. Recessions have happened in the past, but they come on slowly. The kind of sudden stop in economic activity that we are looking at is well outside the realm of anything we’ve experienced. And it’s going to break the unemployment insurance system unless Congress takes some quick steps to inject funds and change the rules.
Traditional unemployment insurance won’t work
Unemployment insurance systems are run by state governments with a mix of state and federal money and governed by some federal rules with considerable state discretion.
But broadly speaking, the way unemployment insurance works is that if you have a job then you and your employer pay into a fund. That fund then pays out benefits to people who lose their jobs. The benefits, by design, are only a fraction of the beneficiary’s usual earnings, are conditional on providing evidence that he or she is actively seeking a new job, and are only paid out for a limited span of time.
Basically, the system does a great job of helping individuals cope with the reality that in a healthy market economy there are always some businesses somewhere that are failing. Thanks to unemployment insurance, if your employer goes under you have a cushion while you go find another job — but the program is deliberately stingy to make sure you go out and get another one. During big recessions, Congress normally acts to extend the time limit in order to recognize that even diligent job-seekers will have trouble getting new work quickly.
The coronavirus pandemic is causing unemployment to surge, but given the unique situation, we don’t actually want people hitting the pavement looking for jobs.
Arindrajit Dube, a labor economist at the University of Massachusetts, has a proposal for broad changes in the structure of the program to come with the surging demand for help.
“Instead of [unemployment insurance] being a payroll tax financed vehicle to help workers modestly while encouraging them to look for work,” he writes in a policy brief for Economics for Inclusive Prosperity, “we want it to (temporarily) become a fully federally financed vehicle allowing workers to stay at home and companies to not go bankrupt.”
How to change unemployment insurance
That means making the program much more generous so as to come close to fully covering lost earnings, relaxing eligibility requirements so that people don’t need to be actively hunting for a new job, and also expanding the purview of the program to cover people who are having their hours cut rather than people who are being laid off. This last change is particularly important. All throughout the food service sector, employers are currently trying to grapple with conversion to take-out only and reduced demand that combine to greatly reduce their need for workers.
Many business owners, recognizing that unemployment insurance helps you if you get laid off but not if you have your hours cut, are trying to do the right thing by laying off a big swath of their staff.
Allowing unemployment insurance to be tapped by people who have their hours cut would instead allow for “job sharing” where a business hobbled by the recession could keep its full staff on payroll, just with greatly reduced hours. That would be better for morale, would help people cope with the unique child care challenges associated with school closures, and also make it easier for businesses to spring back to full capacity when the emergency ends.
You wouldn’t want to completely replace lost income because there will be a few sectors looking to add staff (Amazon, Walmart, and many grocery stores are seeing increased demand, and hopefully we’ll be manufacturing more masks and other medical supplies soon). But letting workers and businesses go into a kind of hibernation mode is something the unemployment insurance system isn’t set up to do, but could handle with legislative changes.
But Congress really needs to move quickly.
Things are happening really fast
The legislative process has its own logic, and that logic, fundamentally, is slow.
That’s why it’s critical for Congress members to understand that the labor market is currently collapsing at a rate that is completely unprecedented. One can hope that will be a self-limiting process — that we will experience five weeks’ worth of really bad initial claims all in one week and then bottom out — but it’s not obvious that it will be. The layoffs that are happening right now are the direct result of coronavirus measures. But if laid-off workers see their incomes drop precipitously, they will have to pull back on spending. And their spending is income for the rest of us.
Businesses that can stay open under quarantine conditions will have to shut their doors anyway if they have no customers. Waves of bankruptcies could devastate the financial system from the bottom up, rather than the financial crisis trickling down the way it did 12 years ago.
Politicians are clearly aware that the situation is dire, but the sheer pace of events has not thus far seemed to have really broken through in Congress. And unless it does soon, forecasts of a rapid bounce back once the virus is under control could prove to be an idle hope.