CBO releases analysis on extending increased unemployment benefits

The Congressional Budget Office (CBO) said Thursday that if the $600-per-week increase to unemployment benefits amid the coronavirus pandemic were extended for six months, about five out of every six recipients would get more than they could expect to receive from working during that time period.

In a letter to Senate Finance Committee Chairman Chuck Grassley (R-Iowa), CBO Director Phillip Swagel said that for many people, the potential earnings they would have if they reentered the workforce would be less than what they made before they became unemployed.

“Potential earnings in 2020 and 2021 for people who have permanently lost jobs are lower, on average, than their prior earnings, primarily because some knowledge that has value only to the previous employer is no longer productive,” Swagel said. “People who are expecting to be recalled from a temporary layoff also have lower potential earnings than their prior earnings, on average, mainly because some of them will not end up returning to their previous job.”

CBO’s analysis comes as the $600-per-week increase to unemployment benefits is poised to be a major discussion topic in negotiations over the next coronavirus relief package.

The increase was established under legislation Congress passed in March in an effort to provide assistance to millions of workers who suddenly became unemployed because of the pandemic. The enhanced benefits expire July 31.

House Democrats passed a bill that would extend the $600-per-week increase through January, but Republicans have expressed concerns that the bump may dissuade people from going back to work because some people are getting more in unemployment benefits than they had been in wages.

GOP lawmakers are looking at extending the boost to benefits by a lower amount or allowing people to keep a portion of their benefits for a period of time when they return to work.

The Senate Finance Committee is scheduled to hold a hearing next week about unemployment benefits during the coronavirus pandemic.

CBO estimated that if the enhanced benefits were extended for six months, through Jan. 31, recipients would on average spend an amount on goods and services that would be closer to their pre-employment levels of consumption than it would if the benefits were not extended.

CBO also estimated that if enhanced benefits were extended, U.S. economic output would likely be greater in the second half of this year that it would without it, but that in the 2021 calendar year, output would be lower than it would be absent an extension. Employment would probably be lower in both the second half of 2020 and in 2021 than it would be if the $600 weekly boost is not extended.

“The estimated effects on output and employment are the net results of two opposing factors,” Swagel wrote.

“An extension of the additional benefits would boost the overall demand for goods and services, which would tend to increase output and employment,” he added. “That extension would also weaken incentives to work as people compared the benefits available during unemployment to their potential earnings, and those weakened incentives would in turn tend to decrease output and employment.”

Swagel said in his letter that CBO estimates that output would likely be greater and employment would likely to be lower in the second half of 2020 if there is an extension “because workers employed as a result of the boost in demand would have higher average earnings (and contribute more to output) than the people who were not employed (because of the extension’s effect on work incentives) would have had if they were employed.”

In 2021, both output and employment would be lower than they would be absent a six-month extension of the increased unemployment benefits because the effect of a smaller labor supply would last longer than the effect of boosted demand, Swagel said.

In a statement issued following the release of CBO’s analysis, Grassley criticized Democrats for proposing to extend the $600-per-week increase.

“As we begin to safely re-open our economy, it should be the goal of Congress to get America back to work, while helping those who can’t in a more targeted and efficient way,” Grassley said. “A strong economy and a healthy population are not competing goals; they go hand-in-hand.”

But the top Democrat on the Finance Committee, Sen. Ron Wyden (Ore.), said that enhanced unemployment benefits need to continue, and that legislation should include triggers that tie the amount of the benefits to economic conditions.

“CBO notes that the $600 boost to benefits has been vital in maintaining consumer demand. Workers who are unemployed through no fault of their own are still able to pay the rent and buy groceries, which is propping up the economy,” Wyden said. “CBO also notes that fear of getting sick has an effect on the labor market, reiterating that crushing the virus is key to reviving the economy.

Separately on Thursday, Democrats on the Joint Economic Committee released a report arguing that it would be a “colossal policy mistake” to let the boost to unemployment benefits expire at the end of July. The report said that concerns that the enhanced benefits are disincentivizing work are misplaced. 

“High unemployment rates are caused by the pandemic, the reduction in aggregate demand, and the child care crisis—not the [enhanced benefits],” the Democrats’ paper said.

Updated at 5:29 p.m.