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Down to the Wire on Unemployment Benefits

Photo of employee at a resturant cleaning

In June, California saw the first upturn in the labor market since the COVID-19 pandemic hit. While that was much-needed good news, the continued spread of the virus has now required businesses to slow or reverse reopening, which suggests this upturn may not last. Even with the bounce back, over 2.8 million Californians were unemployed in June, and in the last week workers filed 456,000 new claims for unemployment compensation.

Against this landscape, the $600 per week supplemental unemployment benefit granted by the CARES Act is set to expire at the end of July. A potential decision by Congress to extend or adapt this benefit has important consequences: supplemental assistance not only supports workers who must stay home due to business closures but also injects money into the economy.

The jobs rebound came mostly from the hardest-hit sectors, especially accommodation and food services. California added about 560,000 jobs between May and June, and workers re-entering the labor force made up just over two-thirds of that growth. Health care and retail were the second and third largest sectors of job growth in June, each adding over 70,000 jobs. Jobs have not returned in other sectors like administrative services or government, which experienced smaller but significant initial declines.

While the June bounce back is a good sign, growth may lag in coming months. Weekly unemployment claims have not abated, averaging about 350,000 per week since May, and even slightly increasing in the past month (including claims by self-employed, gig, and other workers). The crisis many workers face is far from over, and if the unemployment compensation supplement expires, these workers may struggle to meet their basic needs.

Although the hard-hit accommodation and food services sector showed the most job gains, this sector also originated the most unemployment claims. Even in a good economy, workers in this sector experience high poverty, based on the California Poverty Measure. The $600 per week supplement more than replaces their typical wages. As of 2018, the average weekly wage in accommodation and food service was $481; today the median worker claiming unemployment insurance (UI) receives 173% of their prior wages, including the supplement. Absent new legislation, they would see weekly unemployment benefits drop from $841 to $241 next week.

Working poverty and the typical unemployment benefit today are also high in the other services sector, including auto repair and personal care, and the administrative services sector. Should the supplement expire—or if an extension is delayed—the share of earnings the unemployment benefit would cover in all industries may return to around 50%, based on current claims.

As the debate on the federal stimulus rages, some worry the high unemployment benefit is a disincentive to return to work. But recent evidence suggests no correlation between UI benefit levels and job losses or rehiring.

Nonetheless, policymakers could use other tools that incentivize work but continue to bolster income. In particular, expanding the Earned Income Tax Credit could support employed workers who have reduced earnings or who face additional health risks at work. A focus on policies to support workers as the virus still spreads recognizes the risk that slackening consumer demand could prolong the economic crisis.

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