How Congress may automatically phase out unemployment benefits

on Feb21
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Americans may get another dose of extra unemployment benefits — and policymakers are debating the best way to deliver them.

A host of lawmakers and economists want to put the aid on autopilot, phasing out supplemental benefits gradually rather than shutting them off on a specific date.

Those so-called automatic stabilizers would help avert a benefits “cliff,” as occurred the day after Christmas when prior pandemic relief temporarily lapsed for millions of Americans.  

But there are many schools of thought on how to accomplish the goal.

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Some think it’s best to wean workers off aid as economic metrics like the unemployment rate improve. Others say public health measures, such as the number of Covid vaccinations, may be a better barometer.

Ultimately, the metrics serve to inform the health of the economy and labor market. And that’s important since offering generous benefits in a healthy labor market may discourage workers from finding a job and hold back a recovery.

But each approach brings distinct pros and cons.

“It’s economic, so there are always tradeoffs,” said Ernie Tedeschi, a policy economist at Evercore ISI and former senior advisor at the Treasury Department.

President Joe Biden and congressional Democrats aim to pass a $1.9 trillion pandemic rescue package by mid-March, when current relief will end for millions of workers. While its final contours are unclear, the legislation would likely raise benefits by $400 a week through August and perhaps longer.

Biden initially called for the length and amount of relief to fall “depending on health and economic conditions,” but didn’t identify a specific trigger.  

House Democrats didn’t include such a measure in an initial legislative draft. But the Senate may opt for it, Tedeschi said. Sen. Ron Wyden, D-Ore., chair of the Senate Finance Committee, supports the policy.

Unemployment rate

The unemployment rate seems an obvious starting point for such a policy discussion.

“That’s where the rubber meets the road for workers,” said Heidi Shierholz, director of policy at the Economic Policy Institute, a left-leaning think tank, and a former chief economist at the U.S. Labor Department.

The concept is straightforward: Enhanced unemployment benefits fall in tandem with the unemployment rate, which signals an improved job market.

Proponents generally envision pegging benefits to state jobless rates (which can vary dramatically) instead of the national statistic. For example, Nebraska and South Dakota had a 3% unemployment rate in December; in Hawaii and Nevada, it was above 9%.

The recovery is best served by a plan that keeps aid to the unemployed going as long as we need it and no longer than that.

Peter Ganong

economist, University of Chicago

Last year, Wyden and Sen. Chuck Schumer, D-N.Y., now the Senate majority leader, had proposed a $600 weekly benefit boost in states with a jobless rate above 11%. The dollar amount would fall incrementally and disappear after the state rate dropped below 6%.

But using the unemployment rate has some drawbacks, according to economists.

Chiefly, it doesn’t capture all the volatility in the labor market — it omits people who are out of work but aren’t looking for a job. As a result, the true jobless rate is likely higher across the country.  

This has encompassed millions of people in recent months, perhaps due to childcare responsibilities, Covid health concerns or workers discouraged by a lackluster job market. Such workers may be able to collect unemployment benefits due to expanded pandemic-era eligibility criteria.

“That was a large margin of [labor] weakness throughout the Great Recession, and it’s a large margin right now,” Tedeschi said.

Lawmakers may consider broader labor metrics, like changes to the employment-population ratio, economists said. This statistic captures the share of the working-age population with a job and includes Americans who may have left the labor force.  

Another option might be to tie aid to the number of workers collecting unemployment benefits by state. Such data is released regularly (once a week rather than monthly) and may detect economic trouble more quickly than other measures.

But it may also be influenced by a state’s relative ability or inability to process claims quickly, or by high levels of fraud — thereby distorting the economic picture, according to economists.

Covid vaccine

Health measures may also offer a reliable barometer for the drawdown of enhanced benefits.

“Instead of tying to the unemployment rate, as others have suggested, we should tie unemployment benefits in the pandemic to vaccinations,” Peter Ganong, an economist at the University of Chicago, said in a recent tweet.

Vaccination isn’t a perfect policy approach but has two primary benefits: Aid would be available for as long as the public-health risk persists, and it skirts some of the problems associated with using the unemployment rate, Ganong said.

It likely makes sense to give U.S. labor officials flexibility to adjust vaccination thresholds if take-up is low or new virus strains become more of an issue, Ganong said.

“We need to have humility about how long it will take to get everyone vaccinated,” he said. “The recovery is best served by a plan that keeps aid to the unemployed going as long as we need it and no longer than that.”

Hard to design

Of course, the challenges involved in creating an automatic trigger are perhaps a reason to avoid the policy altogether, said Michael Strain, director of economic policy studies at the American Enterprise Institute, a right-leaning think tank.

“I don’t share the enthusiasm many people seem to have for these,” Strain said. “It’s really hard to craft a good trigger proposal because the economy is hard to predict.”

Such policies also make it more difficult to do budget policy and forecasting, he said.

Plus, Strain said, unemployment benefits already contain a trigger mechanism: extended benefits. States automatically extend payment duration (though not the level of pay) to workers once their unemployment rate bounces above a certain threshold. Extended benefits are currently available in 20 states, according to the Labor Department.

“Congress is a legislative body, and its job is to pass laws,” Strain added. “I think even if we had the perfect triggering mechanism, they’ll still want to do things.

“Or they won’t want to use the trigger.”

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