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April 9, 2020

Amid the COVID-19 Crisis, a Tale of Two Cities

The COVID-19 pandemic has resulted in both a major public health crisis and a major economic crisis. The economic impact is coming primarily via social distancing (or stay-in-place) restrictions that have resulted in the temporary closing of nonessential businesses in many parts of the country. As a result, millions of workers have been laid off or furloughed. Unemployment claims for the week ending March 21 totaled more than 3 million—the highest number of seasonally adjusted initial claims in the history of the series at that time. That record was broken quickly. For the week ending March 28, the number of seasonally adjusted initial claims increased to an adjusted 6.9 million. For the week ending April 4 there were an additional 6.6 million new unemployment insurance claims.

In response, Congress has passed two laws that contain measures designed to help individuals affected by this shock: The Families First Coronavirus Response Act (FFCR Act), signed into law on March 18, and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), signed into law on March 27. (In addition, the Coronavirus Preparedness and Response Supplemental Appropriations Act was signed into law on March 6 and provided $8.3 billion in emergency funds to state and local governments to fight the outbreak.)

In this macroblog post, we summarize how the assistance offered in the acts supplement the preexisting social safety net to financially support a hypothetical displaced American working in a restaurant prior to the outbreak. We present our case study in two locations: Boston, Massachusetts, and Birmingham, Alabama. Overall, the potential impact of these acts depends on the ultimate length of the unemployment spell, variation in state unemployment insurance laws, and variation in cost of living.

Our case study: Introducing Chef Andrew

Chef Andrew is single adult 25 years old without children. He works full-time in a restaurant, earning the area-specific typical entry-level wage for chefs. On April 1, Andrew's restaurant employer closes. He is laid off but is unable to find another chef job since many other restaurants are also closed or operating in limited capacity.

What the acts and existing social safety net do

Both acts have a variety of provisions to help those affected by COVID-19, but we focus only on the key unemployment-related components of the acts that benefit workers directly. By focusing only on workers, the analysis excludes components that incentivize employers to retain or rehire workers. In addition to the acts, the preexisting social safety net provides assistance to low-income individuals, including those who encounter short-term periods of financial distress. We review the key elements of the acts and the social safety net that are relevant to Chef Andrew.

  • Individual receipt of up to $1,200 in tax rebates and an additional $500 per qualifying child. The rebate begins phasing out when a single filer's annual income exceeds $75,000.
    • We assume Chef Andrew makes $34,472 per year in Boston and $37,000 in Birmingham. In either city, he receives the full rebate of $1,200.
  • A suspension of all payments on federal student loans through September 30 and a pause on the accrual of interest.
    • We assume Chef Andrew pays $100 per month in student loan payments. The suspension of payments suspension will allow him to reduce monthly expenses between April and September.
  • Expansion of unemployment insurance (UI). On top of the regular state UI benefits, the federal government provides an additional $600 per week in federal pandemic unemployment compensation through July 31. After an individual reaches the state's maximum number of weeks on UI, emergency federal UI benefits extend the state UI benefits for up to an additional 13 weeks.
    • In Birmingham, Chef Andrew's regular state UI payment is $275 per week for 14 weeks. Boston provides a higher dollar amount of unemployment compensation: $353 per week for 26 weeks.
  • The FFCR Act suspends work requirements for determining Supplemental Nutrition Assistance Program (SNAP) eligibility until the declared end of the national public health emergency.
    • Without the act, Andrew would have access to SNAP for three months only while unemployed. The act provides possible extended eligibility to the program. The initial amount he receives is small (less than $20 per month). However, if he is still unemployed after the maximum duration of UI, the size of the support will be larger (about $200 per month).
  • Medicaid and health insurance subsidies provided by the Affordable Care Act (ACA) help low-income individuals afford health insurance, but the laws vary significantly from state to state.
    • When Andrew becomes unemployed, we assume he loses access to employer-sponsored health insurance. In Boston, Andrew is eligible for either Medicaid or ACA subsidies, depending on the amount of his UI income. This significantly reduces his health insurance costs compared to Alabama, which has not expanded Medicaid under the ACA. Therefore, Andrew in Alabama has to pay the full cost of health insurance on the private market when he is unemployed. We estimate this cost to be about $400 per month.

The accompanying analysis describes the assumptions and specifics of how each program assists Andrew during his period of unemployment.

Putting it all together: Birmingham and Boston

Here, we summarize how the provisions in the FFCR and CARES acts, along with the preexisting social safety net, combine to support Andrew and help him pay his living expenses. The vertical axis in the following chart shows net resources, which we define as the sum of after-tax income, SNAP, Medicaid, ACA subsidies, and assistance from the two acts, minus the basic expenses affected by the acts and safety net provisions (food, health insurance, rent, and student loan payments). A value of net resources above zero can be thought of as the excess amount of money that can be used to cover additional expenditures.

The chart shows monthly totals of Andrew's net resources from January 2020 to January 2021. We assume his period of unemployment and the distribution of the acts' funds begin in April 2020. We also assume he remains unemployed for 10 months, a period that includes the maximum duration of assistance under the acts in Massachusetts—39 weeks—and an additional month of unemployment simply to illustrate his financial status without any of the acts' financial support.

Since the dynamics of the net resources over time is complex and depends on changes in individuals' income and expenses over time, we provide a simplified summary here and present a detailed analysis in the accompanying analysis.

Net Resources: Birmingham, AL vs. Boston, MA

Before the crisis, Andrew has about $1,000 of slack in his monthly budget in Birmingham. In Boston, due to the slightly lower wage and higher living expenses (rent in particular, which is more than twice as high in Boston as in Birmingham), he cannot meet his covered expenses even before he becomes unemployed. Thus, in this period, he would likely have to borrow to make ends meet.

When he loses his job in April, the acts (represented by the green lines) allow Andrew to cover basic expenses in both cities from April until August. Despite the fact that the financial support package is larger in Boston than in Birmingham, net resources are higher in Birmingham for this period because of the difference in the costs of living. In September, if Andrew is still unemployed, his net resources drop below zero in both cities. The FFCR and CARES Acts improve Andrew's financial security relative to a world without the passage of the acts. Without the acts (represented by the blue lines), net resources drop below zero as soon as Andrew loses his job and remain negative for the duration of unemployment.

Our case study highlights that although the FFCR and CARES Acts provide financial stability for displaced workers in the short term, the size and duration of the acts' positive impact will depend on individual circumstances, including their income prior to unemployment, state of residency, and household composition. Duration of the crisis also matters. The longer the COVID-19 crisis continues, the greater the financial stress for many households and the greater the call for additional policy action.