What Congress got wrong about calculating the unemployment insurance benefit

Editor's Note: (Jay Zagorsky is a senior lecturer at the Questrom School of Business at Boston University. The opinions expressed in this commentary are his own.)

During the Covid-19 pandemic, Congress gave unemployment insurance recipients an extra $600 per week for three months as part of the Federal Pandemic Unemployment Compensation program. That benefit ended at the end of July, and while the virus is still spreading across the country and stalling the reopening process in many places, Congress cannot seem to agree on extending the bonus payments.

After the benefits ran out, President Trump issued an executive order that allowed for up to $300 a week in additional unemployment benefits to be administered by the states through the Federal Emergency Management Agency (FEMA). But the system is riddled with problems -- including the fact that since the payments don't go through the traditional unemployment system, the states need new protocols in order to issue the payments. This has caused severe delays, and most states are saying recipients won't receive checks until mid-to-late September.

Using FEMA to fund unemployment insurance also means less money will be available to help citizens when natural disasters, like hurricanes, hit the United States. If payments were authorized by Congress, FEMA's disaster budget would be protected.

Congress should extend the bonus payments, allowing the President to rescind the executive order. The economy is in a precarious situation, and many workers need financial help.

The goal of unemployment insurance is to help people who have lost their jobs through no fault of their own to survive while also providing an incentive for people to go back to work.

However, the $600 that was paid before is too much. Congress needs to incentivize people to go back to work. A better payment amount should be a bit less than $350 extra per week, to ensure that workers will still want to get another job.

Here's why I think that amount makes sense.

Under normal circumstances, unemployment insurance pays a fraction of each worker's paycheck for typically up to six months. In general, it replaces less than half a person's pay. If you earned $1,000 per week and lose your job, then unemployment insurance will give you about $400 per week. The replacement is not 100% to give the unemployed an incentive to get back to work.

Part of the reason for the current political impasse over extending additional unemployment benefits is a misunderstanding of two statistical terms, mean and median. Both represent an average. The mean is when you sum up all the numbers in a series and divide by the count. The median is when you sort all the numbers into order and take the middle value. The mean is more commonly used than the median in both conversation and in calculations.

In order to calculate what the benefit would be when Congress was drafting the Coronavirus, Aid Relief and Economic Security Act (CARES), they checked the Department of Labor data for 2019. People who received unemployment payments had been earning an average of about $970 per week. The publicly available data show the national average unemployment payment was $370 per week. So the average loss of income by being on unemployment was $600 per week -- the figure picked by Congress to supplement unemployment insurance for three months. The problem is that these averages are the mean and Congress should have used the median, because outliers -- those people with very high wages who lost their jobs -- pushed the mean wage value up. The median does not change because of these outliers.

A team of University of Chicago researchers calculated the median amounts and found median earnings were actually $688 for those who collected UI payments in 2019 -- $280 less than the mean $970 wage. They also found the median unemployment insurance payment was $346 for laid-off workers in 2019. This is about $25 less than the mean $370 payment.

Using median figures instead of mean figures, the extra boost needed to ensure the unemployment insurance system gives the typical worker 100% of their pay is $342 per week extra, not $600.

This misunderstanding between median and mean caused some Americans to get more money from unemployment insurance.

As a result, some business owners have reported having trouble hiring low-wage workers, because many were making more money being unemployed than working. The argument is concisely stated by Senator Chuck Grassley who said: "This discourages people from returning to work or taking a new job, delaying the recovery."

No matter what the dollar value any of us think is right, the big idea is simple. Don't use the mean in important calculations when you really should be using the median.