Will the CARES Act Help Businesses Rehire Americans?

Nearly 20 million Americans have lost their jobs. Can the CARES Act fix that?

The CARES Act became law on March 27, 2020. By that time states across the country had already spent two consecutive weeks reporting the largest employment collapse in U.S. history.

More than 10 million Americans had filed for unemployment benefits by March 28. This likely understates the actual scope of job losses given that between 50% and 75%  of eligible workers don’t typically file for unemployment benefits and that, at the time, contract workers and the self-employed couldn’t file at all. 

At the time of writing, states are reporting more than 6 million new jobless claims per week, leading to an unemployment rate of nearly 15%. The situation has moved too fast for the Bureau of Labor Statistics to conduct any economy-wide studies as yet, meaning that these numbers still don’t include any Americans who have not filed for unemployment, who may not be able to, or who may not know they’re eligible. While the government has recorded nearly 20 million Americans out of work since the beginning of the coronavirus quarantine, the true numbers may be much more, if not nearly double the amount.

For economists and government officials, this has presented two immediate questions: How to stop employers from laying off more workers, and how to get them to rehire staff that they have already let go. As the government tries to bring the CARES Act online, economists say that these short-term results will be an essential measure of success. Specifically, they say, keeping workers connected with their jobs will be essential to a shorter, more sustainable recovery.

The CARES Act Attempts to Restore Employment Primarily Through Business Lending

“The goal of the CARES Act, as I see it, is to make sure that when the public health situation improves such that we can reopen the economy, we have an economy to reopen,” said Gabriel Ehrlich, an economic forecaster with the University of Michigan. “Every day that goes by that these businesses are not getting assistance is another day that more businesses will have to close.”

Approximately $850 billion of the $2.2 trillion appropriated in the CARES Act is dedicated to helping businesses replace cash flow lost during the coronavirus emergency. Of these programs, two in particular are designed to encourage rehiring among employers that cut jobs during the early weeks of the crisis. (A third, the employment tax credit, is designed to compensate companies for retaining employees in general.)

For small employers, the law tries to encourage rehiring through the Paycheck Protection Program. This provides up to $10 million in loans to businesses of less than 500 employees, money which can be used to cover payroll, rent, mortgage and utility payments.

The government will forgive these loans, turning them into grants, under three conditions: First, that the business not reduce workforce or employee pay once they receive the loan. Second, that the business “quickly rehire” any employees laid off between February 15 and April 26. Finally, that the business spend at least 75% of the loan on payroll costs.

“We think the Paycheck Protection Program is very important for small and medium size businesses,” Ehrlich said. “It’s an attempt to help the businesses pay their other expenses, but especially payrolls while they’re forced to be closed by the pandemic. I think the success of that program is going to be one of the most important determinants in how fast can we get the economy back on its feet when we open back up.”

Yet the law as currently written only provides money for eight weeks’ worth of costs. Boston area business owners interviewed by The Street expressed concerns over this limited funding. No one knows how long the quarantines will last, and most independent observers anticipate an ongoing recession once the quarantines lift. As a result, business owners question whether they can afford to rehire employees for eight weeks, only to lay everyone off again once the money runs out while their stores are still closed.

For large businesses, defined as 500 employees or more, the CARES Act offers less generous terms. The law creates a $500 billion lending and guarantee fund. Through this program businesses can apply for relief loans either issued directly by the government or on the generous terms provided by government-backed third party loans. This can help big companies stabilize their cash flow through the coronavirus emergency, however like the PPP it comes with a rehiring and retention clause.

Companies that accept this money must keep at least 90% of their payroll intact. Any layoffs or pay cuts must be “quickly” restored to levels as of February 15, 2020.

These provisions have been slow to take effect, with businesses reporting that little, if any, actual distributions at time of writing. However economists argue that businesses are likely to respond well once the loans begin to go out.

“The SBA loans were the right form,” said Jesse Rothstein, Director of the Institute for Research on Labor and Employment with the University of California at Berkeley. “What you need to do is tell employers, ‘if you rehire the workers we will pay the cost.’ You can’t ask employers to hire workers who won’t work unless you’re going to pay for it.”

Acknowledging the “rocky start” to CARES Act distributions, Rothstein argued that many design choices reflect the speed with which the law has to take effect.

“It was the best that could be done within our system,” he said, “and I think it will wind up working Even though there are a lot of correct complaints about problems, I still think it’s going to be pretty good.”

Restoring Lost Jobs Will Be Critical to a Future Recovery

Most analysts now believe that the coronavirus quarantines will segue into a standard demand-side recession once state governments agree to reopen their economies. This has emerged as a consensus among economists, many of whom had initially hoped for what is known as a “V-shaped recovery,” a dramatic loss of jobs and wealth followed by an equally steep hiring and investment cycle.

To try and mitigate this, the CARES Act props up household finances by both dramatically expanding unemployment benefits and issuing a $1,200 cash payment to every taxpaying adult in the country. This tries to support the economy by helping consumers to continue spending at the businesses which remain open, allowing those businesses to retain employees and avoid layoffs. This what is known as a “demand-side response,” literally supporting the economy by helping to maintain consumer demand for goods and services.

Yet simply maintaining household finances will not be enough.

“The stimulus act will help,” said Rothstein. “There are a few problems that we have to deal with all at once. One is we just have to keep people afloat. If everyone is going bankrupt right now, that has bad implications for welfare and our ability to recover quickly.”

“A second priority, much smaller than the first one, is the more we can maintain connections between employers and workers the more likely it is that we’ll be able to bounce back quickly. If, when a restaurant reopens, it has to rehire all its dishwashers and cooks and waiters, it’s kind of like that business is starting over.”

The issue, essentially, is speed.

For economists, one key to a swift recovery will be how quickly America’s business community can bounce back to normal. (Every economist who spoke with The Street for this article emphasized that this is one essential element for a recovery, along with a medical solution that allows consumers to feel safe in public again.) If local shops and restaurants can reopen and resume business quickly, they can rehire both old workers and new. This will create further opportunities for growth as these re-employed workers begin spending again themselves.

Businesses that maintain their payroll through the quarantine will be in a far better place to do that.

A restaurant which can afford to pay its staff while closed can begin scheduling shifts almost immediately when the state government lets them start seating patrons again. A store that never had to lay off workers can begin stocking shelves the night before, while vendors that could keep their rosters fully staffed can begin making deliveries as soon as the orders start coming back in. This is the best case scenario for bringing the country back from what economist Paul Krugman has dubbed its “medically induced coma.”

On the other side of the ledger, businesses which lose their relationships with employees will take longer to reopen.

“The longer this goes the less likely people are to think of themselves as employed,” said Rothstein. “People who are unemployed start looking for work. There may be less pressure for that now because we’ve made unemployment more generous… but I still think people who are on unemployment are going to gradually melt away and look for other work”

Replacing those workers who melt away will impose costs and delays on businesses trying to reopen. Those costs can ripple outward, if vendors and supply chain companies can’t meet orders due to the same staffing issues. The more businesses have to start their staffing over again, the longer it will take for the economy to restart and recover.