Many laid-off Americans may get more money than they did in work

Editor's note (May 21st): This article has been updated to include figures from the Department of Labour for the week ending May 16th.

ON MAY 21ST America’s Department of Labour reported that 2.4m people had filed for unemployment insurance in the week to May 16th. That took the total for the past nine weeks to 38.6m. In February the unemployment rate was a mere 3.5%, equalling recent 50-year lows. But the covid-19 pandemic sent the country’s unemployment rate to 14.7% in April, the highest since the Depression (see left-hand chart).

So rapid a rise in unemployment would stress any country’s unemployment-insurance (UI) system. Some, such as Britain’s, have coped surprisingly well. America’s has not. The federal government funds the administration of these benefits through grants tied in part to how much each state paid in jobless claims in the previous year. America’s long economic expansion left its system woefully underfunded. So although the weekly $600 top-up to UI that Congress approved in late March is nominally generous, millions of people have not yet received their money. Preliminary data analysed by The Economist suggest that up to 15m Americans who applied for insurance in March and April had not received money by the start of May. The top-up is due to expire at the end of July.

UI is intended to replace a share of lost wages while a recipient looks for work. Democrat-run states in the north-east tend to be more generous than Republican-run southern states, but overall, pre-pandemic America had perhaps the rich world’s stingiest system. The average payout in 2019 was equivalent to about 40% of previous earnings. Tough rules ensured that only those diligently seeking work would be granted welfare, and payouts were strictly time-limited.

Now America may have the world’s most generous system, and some on the right worry that it may discourage work. Work-search requirements have been waived—people should be at home rather than pounding the pavement—and states have extended time limits on payouts. Workers deemed ineligible for ordinary UI—because they are self-employed, business owners or have an irregular work history—can now apply. And the extra $600 a week means that some can expect a hefty pay rise (see right-hand chart). Analysts at Goldman Sachs estimate that three-quarters of laid-off workers are in line to receive benefits that exceed their former wage. Payments may be slow to arrive, but workers will in theory receive back-pay when their claims are finally processed.

The creation of some odd economic incentives was, to an extent, unavoidable. The states’ UI systems are archaic, relying on programming languages devised as long ago as 1959, making it impossible to tailor payouts more sharply. Hence the flat $600-a-week boost, which is, roughly, the difference between the national average weekly wage in 2019 ($970) and the average unemployment payout that year ($370). Giving some workers more money than they had earned in a job may not be the best use of public resources, but the people who benefit most are likely to be among America’s poorest. The cost, even on the highly unrealistic assumption that 30m workers are on the programme for a whole year, would amount to just 3% of America’s total fiscal stimulus.

Editor’s Note: A longer version of this article (“The jobless machine”) was published in the United States section of our May 16th issue. It can be read here.