A rough look at the most affected industries suggests a potential payroll job loss of over 16 million jobs or 11% of payroll employment. Added to this would be a large share of the almost 9 million self-employed workers in the United States. Both of these numbers will be affected in complicated ways by the CARES act. However, it is worth noting that, in a labor force of roughly 165 million people, 6 million of whom were unemployed before the social distancing recession, the loss of 15 million jobs would be enough to boost the unemployment rate from roughly 3.5% to 12.5%, which would be its highest rate since the Great Depression. Thereafter, the unemployment rate should slowly begin to improve as workers either get rehired or drop out of the labor force. As with GDP, the unemployment rate should improve very rapidly once a vaccine is widely distributed.
The Impact Of CARES
This economic outlook reflects the impact of the CARES act in softening the downturn. The act cannot change the prospect of a very big recession in terms of lost output and employment. However, it may be able to hold the economy in “suspended animation” by ensuring that sudden unemployment doesn’t result in poverty and that many impacted businesses don’t go bankrupt.
Two programs, direct cash payments to households (costing $290 billion) and enhanced unemployment benefits (costing $260 billion), should greatly reduce the economic pain of joblessness.
The cash payment program is relatively straightforward, amounting to $1,200 per adult and $500 per child and phasing out starting at $150,000 for a couple filing joint taxes. Even for those who filed their taxes electronically, however, it will likely be a few weeks before the money shows up in their bank accounts.
In addition, the expansion of unemployment benefits to cover the self-employed, the extension of these benefits to 39 weeks, and particularly the enhancement of these benefits by an additional $600 per weekly check for four months, should leave most laid-off workers in good financial shape. Average unemployment benefits typically replace 50% of previous income from employment. However, with this enhancement, most laid-off workers over the next four months will receive more in unemployment compensation than they did while working. In this context, it is worth noting that, while the average weekly paycheck for all private employees in February was $981, the same statistic was just $620 for the average retail worker and $435 for the average employee in the leisure and hospitality industries.
Another set of provisions are designed to support businesses. In particular, $349 billion is allocated for Small Business Administration loans, much of which are forgivable and thus amount to grants. Specifically, up to 100% of the money used from these loans, for the first eight weeks after the loan is issued, to pay payroll, rent, utilities and interest, is forgiven. However, the percentage of these costs that are forgiven is tied to the firm keeping workers on the same payroll and salary. If you lay off 50% of your workers, you lose 50% of the forgiveness.
This sets up a weird conflict of interest whereby many workers would fare better if they were fired while many small businesses might do better if they kept workers on the payroll. In the end, however, many small business owners may conclude that there is not enough to be gained in wheedling a forgivable loan from the Small Business Administration by keeping workers on the books, when their business is effectively shut down.
The act also contains a $500 billion fund to help distressed industries. $46 billion of this is allocated for loans to the airline industries and other major firms that are critical to national security while the rest is used as a backstop for Federal Reserve loans to other medium and large companies. All of these loans have provisions prohibiting stock buybacks or dividend payments until 12 months after the repayment of the loan or reducing payrolls by more than 10% between now and September 30th. Given these restrictions and the fact that these loans are not forgivable, many larger companies may not want to trade in operational flexibility for government loans unless they have no other choice.
At a first glance, it appears that the interaction of much more generous unemployment benefits with additional incentives for firms not to fire workers will play out in favor of more unemployment, leaving millions of workers officially unemployed for the duration of the social-distancing recession. This is why we conclude that the unemployment rate will likely climb into the double digits.
Other provisions of the law include $150 billion in grants to state and local governments, $180 billion in extra health-related spending, $300 billion in additional personal and corporate tax breaks, $72 billion in outright grants to airlines, airports and the transportation system as well as additional aid for FEMA and extra funding for food stamps.