Here's why the $600 weekly jobless benefit meant so much to the U.S. economy

Even if Congress and the White House decided to continue the benefit, odds are slim it remains $600 per week.

July 25, 2020 at 1:00PM
Treasury Secretary Steven Mnuchin, right, and White House Chief of Staff Mark Meadows, speak to reporters following a meeting with Senate Majority Leader Mitch McConnell (R-Ky.), at the Capitol in Washington, on Thursday, July 23, 2020. The White House and Senate Republicans neared agreement on Thursday on a new economic rescue proposal that includes another round of stimulus payments to individuals, additional aid to small businesses and a partial extension of enhanced unemployment benefits, ac
Mark Meadows, left, and Steven Mnuchin are working to put together a new stimulus bill. (New York Times/The Minnesota Star Tribune)

An additional $600 per week of federal unemployment benefits has been a blessing to those who lost a job as the coronavirus pandemic began crushing the economy last spring.

It was also a generous deal, at least for many. Roughly two-thirds of the many millions who lost paid work could have easily seen a boost in their incomes as unemployment benefits kicked in.

Now, the $600 weekly benefit has ended. Even if Congress and the White House decided to continue the benefit, odds are slim it remains $600 per week.

Maybe $600 was too much, although picking a better number doesn't seem to be an easy task. One thing we have learned since March is that getting money to low-wage workers who lost their job is pretty smart, if keeping the economy healthier really is important.

Like a lot of other aspects of the government's response to the virus, a beefed-up unemployment benefit in the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was viewed as a short-term measure. Yet unlike every other high-income country, the new COVID-19 cases daily in the U.S. lately has easily exceeded the number of new cases this spring.

As of last week, the United States had 141 cases per 100,000 people over the previous seven days, according to the New York Times. That's nearly six times as many as in Spain and about 16 times that of Canada.

Given that, it's hardly surprising that of the thousands of businesses reported as closed on Yelp's site as of earlier this month, well over half were then permanently closed, up 14 percentage points since June. The latest number of Americans filing for unemployment benefits, a whopping big number again, just showed an increase from the previous week, too.

Aside from the virus causing people to stay home, it also could be that the economic pain is still spreading out from the parts of the economy first battered by the pandemic. That means what we're going through is starting to look a little more like a "normal" recession, with broad declines in demand leading to more lost jobs.

It's important to understand that unemployment insurance was not really meant to be a dollar-for-dollar replacement. It's kind of like car insurance with a big deductible: it's a help but it doesn't make the policyholder whole. Minnesota's system provides about half of the old paycheck.

The initial goal of these programs back in the 1930s was simply keeping families afloat, not to stimulate demand. But unemployment insurance turned out to be great for stabilizing the economy, building up money in good years and spending it when the economy goes south.

The original idea behind the federal government's extra unemployment benefit was to completely replace the income of workers who were either temporarily furloughed or laid off. The weekly $600, combined with benefits under state law, worked out to be a full replacement of wages at the average American wage of about $30 an hour.

This turned out to be another case, though, where citing the "average" wage turns out to be misleading. It's a little like Jeff Bezos joining a neighborhood book club, and someone then noting that on average members are a bunch of billionaires.

The median wage — half earning under that number and half over — is far lower than the average wage, which means that there's a lot more lower-wage workers that high-paid ones. Even in high-wage Minnesota the median wage is only about $21.50 per hour.

Back-of-the-envelope math shows how with the additional $600, the break-even with working came out to be a wage of about $30 per hour.

If a worker had earned far less than that, the $600 weekly federal benefit combined with the state's benefit proved to be much better than working. At the current minimum wage for smaller employers now in effect in Minneapolis of $11.75 an hour, the total UI benefits exceeded wages by almost 80%.

If that doesn't seem fair, remember the effects of the virus haven't exactly been fair either.

By the end of May, employment rates for low-wage workers in Minnesota were down about 35% from January, as of the latest data presented by Opportunity Insights, a research and policy group started by economists at Harvard University and Brown University.

An even more interesting story is told by consumer spending. Spending across the board rolled off the table in March and April as much of Minnesota's economy shut down, and then mostly recovered, but at different rates depending on income.

Consumer spending for the state is still down about 4.6% as of the middle of July, but spending for higher income consumers hasn't recovered as much.

These numbers do not explain exactly why behavior might be different depending on how much a worker gets paid. It seems likely, though, that the kind of in-person entertainment and services well-paid people routinely spent a lot of their money maybe hasn't really been available as the pandemic continues.

But for low-wage people, the rate of spending has all but recovered to January's level, although it dipped a bit recently.

Since this spring, the wonks and forecasters have been talking about a hoped-for economic recovery in the shape of a V, a quick bounceback in activity as the worst of the pandemic passes. The reality so far is not convincing.

An exception is consumer spending by low-wage workers, and given the extent of the job losses it's no mystery how that's even been possible. What happens to consumer spending if the additional unemployment money from the federal government is no longer coming?

There are a lot of needs this year competing for the attention of policymakers in Washington. But in this case we can pretty safely assume that low-wage workers looking for work won't be able to spend the money they won't have.

about the writer

about the writer

Lee Schafer

Columnist

Lee Schafer joined the Star Tribune as a columnist in 2012 after 15 years in business, including leading his own consulting practice and serving on corporate boards of directors. He's twice been named the best in business columnist by the Society of American Business Editors and Writers, most recently for his work in 2017.

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