Breaking the Labor Market: COVID-19 and the CARES Act

The new unemployment benefit will have serious second-order effects.

The stimulus, known as the CARES Act, provides an additional $600 per week in unemployment benefits over and above state benefits. Before it passed, conservative politicians pointed out that a lot of newly unemployed might make more than they earned while working. We have not yet fully considered the possible effects.

With over 3 million unemployed in the first week of widespread COVID-19 shutdowns, this step provides stability and comfort during a frightening time. It’s the right thing to do. But doing what is right has repercussions. Social theory and common sense allow some guesses at possible unintended consequences.

The Theory of Social Control

Americans view unemployment as a safety net, a backstop when they hit hard times. We don’t consider it to be ‘welfare’ because welfare has a stigma. Still, social theory regarding welfare may have something to teach us.

In their classic, Regulating the Poor, Frances Fox Piven and Richard A. Cloward argue that relief systems exist in order to enforce social control. Benefits exist to mollify the people during tough times. Elites fear civil unrest. When times improve, benefits are withdrawn to force people back into labor.

Piven & Cloward portray this as malevolent; someone from the other end of the political spectrum would describe it as good business.

Either way, it’s how the system works. For example, regular unemployment benefits were extended in 2008 due to the financial crisis. Congress pared the program back in 2012 and let the extension expire at the beginning of 2014.

This Program is Different

In normal times, unemployment compensation provides only a portion of pay. In Texas, for example, unemployment normally pays about 50% and is capped at $507 per week. A worker would need to be making around $50K per year to receive this.

The new program adds $600 on top of the $507 benefit for 4 months. At $1107 per week, this would be like making over $57K per year for the $50K worker, at least for a few months.

The difference is more pronounced at the lower end. A cashier at a non-essential business making $15 per hour who would normally receive $300 per week in unemployment now gets $900. Their $31K job just turned into a $46K equivalent benefit.

Perverse incentives now abound. Marco Rubio argued that businesses have an incentive to keep workers on the rolls through the other portions of the bill. This seems unlikely for reasons explained in detail below.

Predicting the Future

There is no way to be certain, but here are some short and long-term possibilities.

1. Increased layoffs of low wage and low benefit employees.

Businesses, small and large, don’t like to fire employees. Leaders empathize with their employees. A small family owned business that just saw its demand evaporate might work hard to keep long-time loyal employees. Plus, layoffs bring bad press.

But what if the small or large business leaders knows that employees will actually make more money in a layoff? Congress mitigated the motivation to retain employees as long as possible. The employees can always be hired back later. The crisis will certainly go past Easter, but by August things could be much better.

The CARES act tries to fight layoffs. It provides an employee retention credit to keep workers on the payroll, paying up to 50% of wages. It also defers payroll taxes. But if there is no need for the employee, why pay even 50% of their salary to keep them? Why pay the payroll taxes at all?

Employers might even be able to get the best of both worlds. Could a business reduce a worker to one day a week, enough to keep their benefits? Half of this day’s wages would be paid by the government. In most states, having hours reduced also makes workers eligible for unemployment, and they still seem to be eligible for the $600 benefit. When the crisis ends, the employer would not even need to go through the re-hiring process.

Employers will retain higher wage employees where possible. They will need these employees in the future, and probably need them now. But for low wage employees, employers may be doing their personnel a favor, at least in the short term, if they furlough for four months.

There is no way to know the magnitude of this effect, but logically layoffs will be larger than they otherwise would have been.

2. Drastic labor shortages in logistics and essential retail.

Core to Piven & Cloward’s argument is the idea that reduced relief coerces workers back in to menial, underpaid labor at times when social unrest is unlikely. In the short term, there will be no forcing mechanism. Politically, there is zero chance the initial four months will be undone.

Companies are hiring now. Walmart is going to hire 150,000 workers, Amazon needs 100,000, and CVS needs 50,000. Gig opportunities with Door-Dash, Instacart, and others abound.

In normal times, people are motivated not just by money but by the dignity of work. Useful, productive work fulfills a basic human need to mean something, to make a mark. Work gives us self-worth and socialization.

These are not normal times. A person laid off from a $15 per hour job will now make the equivalent of $21.50. Why take take a grocery or distribution job?

The internet is full of stories about working conditions at distribution centers and fulfillment centers. Grocery is hard work in the stockroom, customer interaction, or both. Any employment risks infection. Dignity of work only goes so far during a pandemic.

The $600 relief even applies to the self-employed and gig workers. These are the individuals that in normal times often want to move to regular employment, but now have less incentive.

3. Structural change at existing employers.

Employers will adapt to the new environment. Demand for labor is skyrocketing. In the long term, companies automate and use technology to reduce labor requirements. But in the short term, the only alternative will be to offer cash and benefits to lure displaced workers out of their government paid social distancing.

At many companies, especially in distribution environments, employees were already overworked and over-stressed even before the coronavirus outbreak. These employees can’t quit, because they will be ineligible for unemployment benefits.

What would happen if new employees were added with the higher wages and cash bonuses needed to get them into the workforce over the next few months? More likely, the current labor crush will prompt employers to improve compensation and wages for existing employees. Sick leave will also become more and more socially acceptable.

Winding Down the Crisis

How will we come out of this? No one knows exactly how the pandemic will play out, so it is impossible to predict what the country will need.

The $600 per month may only last for the four months in the current legislation. On the other hand, we may have millions still on the unemployment rolls as we approach the end of the four months.

There may also be a second stimulus in the next few months. If unemployment, as measured by the number of people receiving benefits, remains high, then we ware likely to see an extension.

In Piven and Cloward terms, the elites may not have the will to coerce workers back into the labor force. Salaries will have to grow their way into labor force utilization.

If this happens even as the economy starts to recover, wage inflation becomes very possible. It is impossible to say whether this would be real growth at the low end of the pay scale, or would be the start of an inflationary cycle.