AEI: Rethinking Unemployment Benefits Could Keep People Working

After Congress failed to reach a deal on continuing enhanced unemployment benefits that were part of the CARES Act, it was easy to point fingers at lawmakers for prioritizing partisan interests over the country’s long-term stability. 

A few scholars, however, put forward the idea that perhaps it’s time for the entire unemployment system to be rebuilt from the ground up to keep more people in their jobs, rather than looking for work and collecting unemployment benefits.

Writing in the Hill earlier this year, Mason Bishop and Brent Orrell of the American Enterprise Institute argue that now is the time to think about a large-scale overhaul of the way unemployment benefits are allocated and delivered, moving to a model they describe as employment stabilization. 

Instead of providing benefits to people who are out of work, the employment stabilization model would provide an incentive to businesses to shift from all-out position eliminations to temporary layoffs that go away once full employment resumes.

Bishop and Orrell argue that this approach would reduce the problems associated with thousands of people trying to access state unemployment benefits at once and finding that outdated technology and infrastructure could not keep pace with demand. Instead of paying individuals, the employment stabilization model would allow companies to work government benefits into existing payroll delivery methods, causing less disruption and less strain on government resources.

“Employment stabilization would build on existing program structures in ways that will prevent layoffs, maintain relationships between employers and workers amid sudden shocks, and lay the groundwork for quick restarts when economic activity resumes,” Bishop and Orrell write. “Rather than filing individually for benefits, employers would certify a temporary layoff to the state unemployment insurance system and benefits would automatically begin to flow.”

It’s unclear when a policy change like this would be implemented, especially with partisan gridlock on the horizon in Congress for the foreseeable future. However, the government did take a small step in this direction with the Employee Retention Tax Credit (ERTC), which was part of the CARES Act passed in the spring.

The ERTC is worth up to $5,000 per employee for businesses that were shut down by government order or experienced a 50% decline in quarterly revenue as a result of COVID-19. 

The ERTC is intended to encourage businesses to keep workers on the payroll even if they are not immediately necessary or fully utilized,” AEI’s Alex Brill wrote in July. “The credit helps preserve the employer-employee connection, allows workers to return to work more quickly as the economy reopens, and prevents interruptions in health insurance coverage for affected employees.”

Senate Republicans included an ERTC expansion in their version of the CARES Act follow up stimulus, but it hit a stalemate with House Democrats who put forward their own ideas in the HEROES Act. Brill argues that ERTC expansion should receive serious consideration to avoid economic disaster moving forward. 

“It is critically important that a robust ERTC be considered a substitute for, rather than an addition to, the $600-per-week extra UI benefit,” Brill wrote. “Curtailing the generosity of UI benefits while increasing the generosity of the ERTC could help both push workers toward employment and encourage employers to pull workers back onto the payroll.”

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Image Credit: Photo by James Yarema on Unsplash

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