This virus health pandemic now weighs heavily on our economy. Financial markets have been volatile. Leading economic indicators often signal that a downturn is approaching ahead of other cyclical changes. February monthly unemployment figures stood at a low 3.5% but it is a lagging indicator. It’s a backward glance at the past.
Initial unemployment claims now tell a different story, a more realistic one given our recent economic shutdown. The average weekly initial claims for unemployment insurance, a leading or predictive indicator, changed dramatically in one week. Latest figures (released on March 26th) showed a substantial rise to 3.283 million for the week ending March 21 due to COVID-19, dwarfing the revised level of 282,000 last week.
Our previous highest record of unemployment insurance claims was 695,000 in October 1982. Certainly March unemployment rate will look very differen tthan February’s level. We should praise unemployment offices for processing so many claims.
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Why Unemployment Matters
Our working lives have been disrupted by the virus. As a result, significant consequential economic effects weigh on households and businesses. When those who want to work are unemployed, families lose their earnings and have difficulties paying bills. They reduce spending to only their essential living needs. Businesses, and our overall economy, are reliant on the health of our households. Consumer spending accounts for about 70% of our GDP. When they consume, businesses benefit. However, as unemployment rises, there will be ripple effects that plague our economy.
High unemployment rates rise during recessions. It peaked at 10% during the Great Recession and reached a rate of 24.9% in 1933 during the Great Depression. That said, we never have zero unemployment as companies move their businesses around, close unproductive businesses causing frictional job losses for some employees. Some economists suggested that we may experience extreme unemployment levels due to the virus. Hopefully, we can avoid that dire scenario. Ongoing Fed action will pump liquidity helping those who need credit.
How We Are Faring
Some of us are fortunate to be able to work remotely from home. Others are heavily engaged in the healthcare service/equipment sector and are on the front lines of this disease. We have many heroes among us who have become casualties. We need to honor their hard work and sacrifices. Meanwhile, there have been many temporary and permanent closings raising concerns how the virus is affecting employees and businesses, especially small businesses.
The outbreak of virus is already financially stressful for many families. Lost compensation due to reduced working hours or pay will cause hardships. Having an emergency fund will help you pay your living costs but many don’t have those savings. Employers have alternatives to reducing their headcount costs, notably furloughs, layoffs and reduction in workforce. How the loss or reductions of employees is characterized will impact many points such as access to company benefits and ability to collect unemployment insurance.
Small businesses are in a dire situation with governmental orders to close for an indeterminate amount of time. They still have rent and other costs to pay. To help public and private employers with fewer than 500 employees, Congress passed The Families First Coronvirus Response Act effective April 2, 2020.
Unemployment During The Great Recession
We need some perspective on the high unemployment during the Great Recession. Bureau of Labor Statistics reported more than 15 million people in late 2009 were without jobs. Peak unemployment rate reached 10% in October 2009. However, not everyone files for unemployment insurance despite their needs. Some find it a difficult process or are unaware of how to go about making a claim. Some people may believe they are not eligible for these benefits.
Filing For Unemployment Insurance Benefits Is A Right
Many who are unemployed fail to file despite being qualified for benefits. According to a study by the St. Louis Federal Reserve Bank, only half of those qualified for benefits applied in 2008-2009. Some filed later on, however, there were still 200,000 people that didn’t claim money they were entitled to. Apparently that isn’t unusual. From 1988-2011, the study reported that an average 37% did without benefits despite being eligible. The process is cumbersome as I can recall from my own experience.
Claims for unemployment insurance will substantially ramp up. Make sure to take advantage of these benefits. The US Department of Labor lists eligibility requirements on their website. We explain here but you do need to check your respective state’s instructions. Look for the standards of the states in which you worked in using CareerOneStop which provides each states’ respective rules.
Minimum standards by state are usually reasonable. Waiting periods for when you may collect money varies by state unless waived. As of January 2020, the average weekly unemployment benefit was $385, ranging from a low of $213 in Mississippi to a high of $546 in Massachusetts. Those who are jobless in Puerto Rico and file claims received $163 per week.
Eligibility For Unemployment Benefits
You are eligible for benefits if you are unemployed through no fault of your own. Typically, you cannot file if you were fired or let go for “gross misconduct.” Please note that you should apply in any case because gross misconduct may only be proven in most cases through a lawsuit. Also, rules may be relaxed during this time due to the coronavirus.
While there is federal guidance for eligibility, each state has their own minimum requirements that a candidate for unemployment insurance benefits must satisfy. Each state varies regarding minimum time worked and wages. States pay the unemployment benefits to the claimant typically for 26 weeks. However, there have been extensions to that timeframe.
The federal government provided an unprecedented amount of financial support during the Great Recession. They extended the unemployment insurance for up to 73 weeks of compensation added to the 26 weeks given by the states for a record total of 99 weeks of coverage.
More Money Will Likely Be Coming For The Unemployed
Please note that there are expectations for a huge federal $2 trillion stimulus package that may eliminate waiting periods and add flexibility to some of the typical rules required. Additionally, the package is expected to provide weekly unemployment benefits of $600 regardless of what state you worked in. The bill is currently pending in the House after passing in the Senate with a refreshing nonpartisan vote. We discuss some features below.
When filing for benefits, you must be available to work and actively looking for work. This means you may have to check in with your local office in person or via Skype to provide updates on your job search. You cannot collect unemployment benefits if you have another job or if you are enrolled in school or for training. However, you may be eligible for unemployment benefits if you are underemployed due to reduced hours or reduced pay.
Retaining Key Company Benefits
Those that are temporarily laid off or furloughed are able to collect unemployment benefits. However, they will collect if they are unpaid during the time they are not working. Typically they will also continue to keep some of their benefits coverage, notably medical/dental and other insurance. Those employees who have been permanently laid off and are qualified (having worked for an employer who has at least 20 employees) will be able to retain benefits for a specified coverage period of time through COBRA (Consolidated Omnibus Reconciliation Act) usually 18 months.
Among those that are not eligible for unemployment benefits are contract workers, the self-employed, people who voluntary quit their jobs without a “good cause,” quit full time work for part time hours, or to go to school or training. However, if you have quit your job for “good cause” you may be able to collect. Depending on the state, good cause relating to the job may be as a result of a serious work-related injury, compelling personal reasons or the job is unsafe.
Government Action As A Result Of COVID-19
Recent passage of the Families First Coronavirus Response Act was designed to provide some mandatory relief for small business owners and their employees. The rationale for this law is to encourage those impacted by the virus to quarantine themselves. However, many small businesses do not provide paid sick leave. Many workers fear losing their earnings and/or their job.
The Act is directed at employers with fewer than 500 employees to provide emergency paid-leave benefits to employees affected by the coronvirus. Small employers will get new tax credits and federal payroll tax relief to help pay for emergency paid relief. It is effective April 2, 2020 through the end of this year.
Paid Sick Leave For Employees
Paid sick leave will be offered for two weeks up to an 80 hour limitation at employee’s regular pay rate. It is further capped at $511 per day if the employee is unable to work because he or she is quarantined and/or experiencing COVID-19 symptoms and seeking a medical diagnosis. There is also paid leave for those employees unable to work because of the need to care for a dependent child under 18 years.
However, the amount of compensation is lower at two thirds of employee’s pay rate and capped at $200 per day. Small business- employers will receive tax credits equal to 100% of qualified payments made to employees. Details on the Act can be found on the Department of Labor’s site and here.
Fiscal Stimulus Bill Is Near Completion
The Senate passed the largest stimulus bill of $2+ trillion for coronvirus-related stimulus. Details have been floating around at this writing but here is some of it. The House still needs to vote on the bill. As everyone knows, a bill is subject to change until it gets signed. Relief is needed for our declining economy. Some institutions play a bigger role and will be allocated more funds. It is difficult to wonder if this is the right amount at this time. It is a big stimulus for a starting point and designed to help Americans most hurt by the virus and its impact from the economic downturn.
Here are some of the key aspects of the Bill are:
Payments If You Earn Under A Certain Income Level
Direct payments are capped to individuals of $1,200 and married couples of $2,400. Parents would receive $500 for each child under 17 years. Payments will be paid to individuals with adjusted gross income (AGI) of up to $75,000 (or $150,000 for couples). The payment amounts decline above $75,000 and are eliminated for those making more than $99,000 (or $198,000 for couples).
Student Loan Relief
The bill suspends student loan payments without penalty for borrowers through September 30, 2020. This temporary relief for students will be available for a short period of time. Many of students have relocated because of the closing of colleges and universities. Many will receive some refunds for dorm costs directly from colleges and universities. However, tuition costs are likely not being refunded as most students are getting their courses online.
A Big Boost In Unemployment Benefits
For those who file claims for unemployment, federal government is providing a $600 weekly amount irrespective of where you had worked. This will be added to the respective money your state will provide. This is quite a boost to the average unemployment benefit of $385. There may greater flexibility on the part of the states, separate from this bill, in terms of getting unemployment without the 7 day waiting period.
Loans To Businesses Have Restrictions
$500 billion in loans, loan guarantees and investments. This is being allocated to airlines, cargo carriers and businesses working in national security with the bulk of the program or $454 billion going to businesses and municipalities. Importantly, small businesses with less than 500 employees will have access to forgivable loans provided they retain employees. Payroll tax credits will incentivize these small businesses to avoid layoffs.
Not surprisingly, the federal government as creditor is restricting businesses receiving loans from issuing dividends. It is not clear if companies getting funds will restricted from corporate buybacks which has been urged by many.
Substantial Money For Several Groups
Hospitals will receive about $100 billion and get a higher bump in Medicare payments for treating virus-infected patients. State and local governments will be getting $150 billion, and Pentagon is getting reimbursed by over $10 billion for funding the National Guard costs that have been accumulating. Some of these amounts may be subject to change and/or limited by restrictions.
Differences Between Furloughs, Layoffs and Reduction In Workforce
Layoffs, Downsizing, or Reduction In Force
Losing your job through no fault of your own can come about through layoffs, downsizing (sometimes called rightsizing) or reduction in force. Temporary layoffs are more like furloughs which infers you will have a job to go back to after a time period. However, if you are permanently losing your job, that is a layoff. Most employees are at-will workers meaning they can be let go or fired for any legal reason. Engaging in discrimination is illegal of course. Employers usually announce large layoffs with notices of their plans to downsize or reduce their workforce by 5% for example.
Furloughs Have Become More Common
Generally, furloughs are mandatory time off from work without pay. Furloughs are not layoffs as employees retain their jobs, benefits and any employee rights they are entitled to. Temporary layoffs are furloughs so long as employees are expected to return to work at the end of the period. A variety of industries may use furloughs when they are seeing reduced demand either seasonally, a cyclical downturn, a union strike, or an emergency such as COVID-19. It could be for a fixed term of two weeks or longer, or for a certain day such as all Fridays in the summer.
A “No Work Rule” for employees means that they cannot engage in even answering a phone call or email related to their job. Otherwise, their employer will have to pay them for their time.
When an employee is furloughed, there is an expectation that they will return to work. They retain their jobs and return at a specific time or if a condition that triggers the end of their furlough is met. That could mean the strike is over or demand for services or products have returned. During the time the employees are out of work, they retain some of their benefits, notably health or life insurance. Furloughs are not usually COBRA qualifying events but it is always best to check with your respective employer.
What About Retirement Benefits?
Retirement benefits may pause for employees on furlough. Workers typically make contributions to their 401K employer-sponsored plan via their paychecks. However, if they aren’t being paid they are probably not making contributions. Neither will their employers make match contributions during furlough periods. On the other hand, employees may seek part time employment or new jobs altogether.
Cost Measures That Can Be Taken
Employers risk losing their best employees and lose productivity if employees have been out for a period of time. Morale often suffers. Employers will typically let temporary employees and contract workers go first. On the latter, employers must check contracts carefully especially in the case of COVID-19. However, furloughs are better than layoffs for employees if they are clearly spelled out.
As alternative cost cutting measures, employers should consider hiring freezes. By not hiring replacements for employees that have left the firm they can let normal attrition play out. Other measures may be to ask your employees to take temporary pay cuts or reduced hours.
Furloughs For Employees Due To the Coronavirus
Unless you are able to work from home, or are those engaged in emergency efforts (eg healthcare, police, fire, air traffic controllers), many employees are unable to work. Many companies since the outbreak of the coronavirus have been furloughing their employees by closing their facilities, shutting down sales, distribution, shipping and other operational functions of their businesses. That is especially true if that function basically addresses nonessential products and services. Concerns about infections and the virus spreading are prompting social distancing.
Small companies employ most of the workers in our country today. They and their employees in a variety of industries may be most vulnerable during this health crisis. Owners are trying to keep their employees on their payroll as long as possible without bankrupting themselves. As a result of these pressures, Congress passed the Families First Act.
We all know people who have been impacted by the virus, some seriously. As Americans, we are reliant on our desires to work, be productive, socialize, and travel. However, most of us are social distancing and working from home, if fortunate, or not working at all. That impacts our economy, our finances, and our morale. We have never been here before and so we are adjusting as best we can to this new normal. However, we want our respective normalcies back as soon as possible.
Unemployment levels are central to the health of our economy. We are just seeing the substantial ramp up in initial claims for unemployment insurance to unprecedented levels. That will hurt us and may be the difference between a mild, short recession or something far worse. Government actions will help. If you are out of work or in a furlough, file for unemployment benefits that are due to you.
We hope you and your families are staying healthy or receiving needed care. Please share any thoughts you may have as we enjoy hearing from you!
With a passion for investing and personal finance, I began The Cents of Money to help and teach others. My experience as an equity analyst, professor, and mom provide me with unique insights about money and wealth creation and a desire to share with you.