Why Sweetened Layoff Benefits May Be at Odds With U.S. Loan Program

The generous U.S. unemployment benefits rolled out to blunt the economic harm caused by the coronavirus could have an unintended effect: it may actually be an incentive for companies to choose layoffs rather than keep staff on their books.

That’s at odds with a government-backed loan forgiveness program set to launch for small and medium-sized firms that opt against job cuts, so long as the bulk of the money is used to keep staff on at full salary.

The number of Americans filing for unemployment benefits last week shot up to more than 6 million, a record high, Labor Department data on Thursday showed. Millions more are set to claim in the coming weeks as major parts of the United States economy remain shut down until the death toll from the virus shows signs of abating.

The CARES Act passed by Congress a week ago was designed to keep businesses and workers from economic freefall. For workers losing their jobs, an unprecedented expansion in unemployment benefits until the end of July was put in place.

On Friday millions of firms are expected to apply to lenders approved by the Small Business Administration for low-cost loans that the government says will be forgiven if employers keep people on their payroll through the end of June.

But businesses are already grappling with a tricky equation: which route is best for them and their employees?

“Unemployment insurance, at least short term, is quite generous so the firms may decide that that’s a better way to go,” said former Federal Reserve Chair Janet Yellen at a Brookings Institute event earlier this week.

Employers have to weigh up the cost to them of keeping their businesses open even if they have limited or no revenue versus at least some of their workers temporarily earning more by seeking unemployment benefits.

A blanket provision of a $600 weekly unemployment benefit on top of each state’s replacement rate of lost wages, which averages about 45% up to a certain salary cap, was implemented by Congress to quickly make more workers whole on their lost paychecks.

Though benefits vary by state, the average unemployment benefit plus the $600 pandemic payout exceeds the weekly median pay of $933. Perhaps 56 million or more workers would be better off temporarily receiving unemployment benefits than staying on the job, Labor Department data shows https://reut.rs/39IbGQ0.