Why the U.S. Government Should Be Guaranteeing Paychecks

Last week, an average of one million Americans lost their jobs every day. While nations around the globe have been ravaged by the COVID-19 pandemic, and have issued shutdown orders to contain the spread, none have seen comparable rates of unemployment.

It doesn’t have to be this way. Our policy choices now can and should prevent the permanent economic scarring and lifelong health consequences of unemployment, which could affect three in ten Americans over the course of this crisis. We need a clear federal response: a paycheck guarantee.

A central goal in stabilizing the economy should be to keep workers on payrolls, with continuity of paychecks and benefits. Ten days ago, Congress took an important first step with the CARES Act, which provides cash assistance (the first wave of which will arrive in bank accounts this week) and expanded unemployment benefits to millions. Those benefits—an additional $600 per week for individuals—will be a lifeline for many and should continue as long as this crisis lasts.

While Congress also set up a Payroll Protection Program to preserve workers’ paychecks and keep small businesses from shuttering permanently, it simply isn’t working.

This failure is due in no small part to poor design. Businesses, and nonprofits, can only apply for these loans through a limited number of Small Business Administration–approved banks. The process itself is slow, confusing, and extremely discouraging. If businesses retain employees on payroll, these loans are converted to grants, but for many business owners, uncertainty dissuades rehiring or retaining workers. We can, and must, do better.

A simpler, more direct form of a grant can provide sufficient support to businesses that maintain payroll. This could augment other forms of support—such as unemployment insurance—by ensuring a range of options for employers and their employees. Government could provide direct paycheck support through a number of avenues, including by working through payroll companies or making payroll transfers through the Department of Treasury or IRS. Given the devastating rate of layoffs, we should choose whichever is fastest.

Such ideas are gaining momentum on Capitol Hill, with support across the political spectrum. The Paycheck Guarantee Act, introduced by Rep. Pramila Jayapal (D-WA), for example, would provide three months of direct payroll support to businesses that can demonstrate a COVID-19 related shutdown or revenue loss. Sen. Josh Hawley (R-MO) has also expressed support for a paycheck guarantee.

The bill’s assistance would be available to businesses of all sizes and to all workers who have lost jobs or are at risk of losing them. But it would especially help low-income workers, who are particularly vulnerable. As a McKinsey Global Institute study showed, close to 90 percent of jobs vulnerable to layoffs or sharp hours reductions pay less than $40,000 per year.

A paycheck guarantee is especially important for small businesses. More than half of vulnerable jobs are in small businesses, which have less cash on hand to weather a crisis. Many cannot survive more than two weeks, and most can’t easily get lines of credit. Keeping workers and employers in existing work relationships is also the efficient choice: The team-building, training, and knowledge embedded in all jobs are exceedingly difficult and costly to rebuild if workers are dispersed.

Ensuring that the most vulnerable Americans can keep a roof over their heads and afford groceries is a humanitarian matter. It’s also essential to maintaining our economic health. Even before the crisis, almost 40 percent of Americans lived paycheck to paycheck, unable to pay an emergency $400 expense; today, they are at risk of debt default and bankruptcy, which would cause a downward demand spiral across the economy.

For those concerned about costs: What we’d be spending on payroll support pales in comparison to the costs of a sluggish, “L-shaped” recovery. As leading economists estimate, three months of payroll support in the U.S. is well within the range of what we have already spent—less than $500 billion, or about 3 percent of GDP. Moreover, keeping workers on the job, and pulling furloughed workers back onto payrolls, could save money by reducing the need for other forms of assistance. And it goes without saying that cutting people loose from their health insurance in the midst of a public health crisis is a profoundly shortsighted policy choice.

A direct paycheck guarantee has become a standard policy response among many nations, including the Netherlands, Australia, Germany, Ireland, and the United Kingdom. All are focused on speed, simplicity, and certainty, and their programs seem to be working. The UK’s unemployment rate, for example, is half that of the U.S.’s, in part because government policy has given businesses enough certainty to maintain their workforces.

Those nations that have prioritized employment continuity, access to health care, paid leave, and strong social safety nets are better able to sustain the shock of COVID-19. They’re also more likely to be healthy and resilient when this crisis ends. The U.S. can join those ranks, but only if we make the right choices now.