Coronavirus and the Unemployment Crisis

The unemployment rate in the United States has been skyrocketing ever since the coronavirus crisis set in. In the last week of March 2020, 3.3 million Americans filed for unemployment benefits. During the first week of April (2020), the number doubled, and an additional 6.6 million Americans filed for unemployment benefits.

This means that a total of 17 million people have filed for unemployment claims ever since the coronavirus crisis began. This represents almost 10% of the American workforce, which has become unemployed in the past three weeks! Prior to this also, the unemployment rate was close to 15%. This brings the total number of unemployed close to 25%!

This is alarming given the fact that a quarter of the United States workforce was only unemployed during the Great Depression. Also, in the past few years, the unemployment numbers were at their lowest.

The employment rates were increasing for almost 100 consecutive months. The economy seemed to be in full bloom, and corporations were finding it difficult to hire candidates because of the competition in the labor market. The unemployment rate was at a half-century low less than a month before the crisis began.

All this has changes alarmingly fast because of the COVID-19 crisis! Hence, this is being touted to be the largest financial calamity that the United States is facing after 1929. Also, during the Great Depression, it took four years for the economy to collapse to low levels. However, during this crisis, the damage has been done in merely three weeks. Hence, it would be fair to say that the current crisis is something that the world has never seen before.

There is some credence to the fact that unemployment is increasing at an alarming rate. However, there are many experts who believe that the government, in its bid to help people have actually made matters worse.

The Unintended Consequences of the CARES Act

The $2 trillion stimulus package which the United States government has launched is called the CARES package. The stimulus has been created with a view to preventing the massive spread of the disease.

Hence, unemployment benefits are quite lenient and generous. However, this is having adverse effects as people are now being incentivized to just sit at home instead of working for a living.

  • Up until now, the unemployment insurance only provided 50% of the pre-layoff wages of the worker for a period of 26 weeks after a job loss. However, the CARES act has now provided an additional payoff.

    It plans to provide a flat payment of $600 per worker per week. This means that any unemployed worker will get $2400 from the government if they are laid off. This would be in addition to 50% of their wages, which they will receive.

  • Therefore, if a person earning $600 per week were to be laid off, then they would receive half of their $600 paycheck i.e., $300 as well as the additional $600 per week. Hence, a bizarre situation has been created in which if a worker does continue to work, they will have to endure hardships, risk the chances of contracting the disease and will be paid $600 per week.

    Instead, if they just sit at home, they will receive $900 per week i.e., 50% higher than their paycheck! The mathematics shows that any American worker who makes less than $62000 per year would be better off just sitting at home and claiming unemployment rather than working for a living. The median income in most states of America is less than $62000. Hence, more than half of the workforce would be financially better off just sitting at home.

  • Also, traditionally unemployment insurance was never paid to people who voluntarily quit their jobs. The termination had to be involuntary in order for the benefits to be paid out. This is no longer the case.

    Any American worker who can prove that they have a reasonable chance of getting coronavirus on their job can voluntarily leave their job and still claim the benefits. Since coronavirus is a highly contagious disease, almost anyone can claim that they are likely to get affected on the job on claim benefits.

  • All the above facts indicate that the unemployment numbers in the coronavirus crisis are inflated and may not give a correct picture of what is happening in the economy. Normally, they are considered to be leading indicators or recession. However, now that may not be the case since many Americans who earn lower wages may be voluntarily quitting their jobs so that they can get a paid break sponsored by the government.

The good news is that economic history shows that recessions caused by pandemics do not last as long. For instance, the recession caused by the Spanish flu only lasted seven months as opposed to the recession of 2008, which lasted for close to four years.

Economic experts believe that there is pent up demand within the economic system. As soon as a vaccine is found and people are able to step out of their homes, they will continue to buy goods and services. This will once again bring the unemployment numbers to record lows.

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