Economic context

Lessons from Unemployment Benefit Expansions during the COVID-19 and Great Recessions

William J. Congdon, Archana Pyati , Joe Peck October 12, 2021

Last week’s jobs report showed that the economy added jobs in September, but at a disappointing rate, raising concerns about the continued strength of the labor market recovery. This was also the first jobs report to capture the state of the national labor market following the expiration of pandemic-era unemployment insurance (UI) programs. As a result, the report reopens questions about the effects of these programs while they were in place, the way they were allowed to lapse, and considerations for their reintroduction.

The three programs enacted by the CARES Act in March 2020 were a monumental expansion of eligibility for and duration and amount of federal UI benefits. The following programs were implemented just as more than 20 million people lost their jobs and the unemployment rate hit a post–World War II high of 14.7 percent in April 2020:

  • Pandemic Unemployment Assistance (PUA) expanded eligibility to full-time caregivers and gig, self-employed, and part-time workers.
  • Pandemic Emergency Unemployment Compensation (PEUC) covered workers who had exhausted their state benefits.
  • Federal Pandemic Unemployment Compensation (FPUC) provided a weekly supplement of $600 (later reduced to $300) to everyone receiving benefits under regular UI and the new programs.

When these programs expired on Labor Day, PUA and PEUC alone covered 7.5 million people, all of whom lost their UI benefits in their entirety. More than 3 million people lost the additional benefits from FPUC.

Expanding UI benefits in recessions is necessary yet has inherent challenges. Economists argue that UI must balance the support it provides workers whose income falls while out of work—what economists call “consumption smoothing”—against any disincentives it creates to return to work—sometimes labeled “moral hazard.” In recessions, the terms of this trade-off shift in favor of more generous benefits: people can’t be discouraged from returning to jobs that aren’t available, the needs of workers are magnified, and the broader economy benefits from the additional spending.

In practice, the relative costs and benefits of recent UI expansions need to be assessed by looking at the data. Evidence from recent downturns can inform the policy challenge of expanding UI effectively in future recessions. In this post, we consider how extended UI benefits affected the labor market, workers, and the economy by examining evidence from the pandemic and Great Recession

Benefit extensions and expirations: Minimal effects on labor supply and demand

Did enhanced UI benefits hamper the labor market recovery from the pandemic? This question dominated the political debate as vaccination rates increased and businesses reopened earlier this year. By July, 26 states terminated pandemic-era UI programs early, stating concerns that they discouraged workers from taking jobs that paid less than their benefits. 

Employers and governors in these states voiced strong concerns about labor shortages, but the data paint a more complex picture. Comparisons of states that ended benefits and those that kept them suggest the former did not experience a hiring surge that many expected.

An analysis of banking data of low-income workers receiving UI benefits showed that by August, the employment rate was 4.4 percentage points higher and benefit receipt was 35 percentage points lower (PDF) among those who lost benefits early compared with those who didn’t. Put a different way: for every eight workers who lost benefits, only one worker found a new job (PDF), the study estimates. Another analysis by the Wall Street Journal found similar rates of job growth in states that ended benefits early compared with those that continued them.

If ending benefits early didn’t increase the number of workers with jobs, did enhanced benefits keep them at home and the unemployment rate high? A July 2021 study (PDF) found the FPUC supplement was a “modest” disincentive on workers’ willingness to take a job, but not enough to justify ending the benefit, which helped workers weather job and income losses. A February 2021 study by the same team found, between April and June 2020, more than half of unemployed workers receiving the supplement returned to the work—many of them recalled by their employers—before it expired in July 2020. Earlier studies from summer 2020 demonstrated that expanded UI benefits didn’t slow rehiring or limit employers’ ability to fill vacancies.

Much of this evidence is consistent with studies of UI benefit extensions implemented during the Great Recession, when workers could be covered up to 99 weeks. One landmark study found extended benefits raised the unemployment rate slightly because by receiving unemployment benefits, more workers stayed attached to the labor force rather than leaving it. (Workers who exit the labor force aren’t counted in the unemployment rate). Another study confirmed that extended benefits kept workers in the labor force and subsequent rollback of benefits increased their exit rate by early 2014.

In our current moment, many are puzzled by why workers aren’t flooding the labor market despite benefit expiration and a growing number of job openings. Economists note that factors other than benefit expirations are at play: the inability to get COVID-19 under control, disruptions in the child care market, and a reluctance to return to low-quality jobs.

UI expansions stabilize households and the economy

Evidence from pandemic-era and Great Recession UI benefit extensions underscores their stabilizing effect on spending and savings by individual workers, households, and the economy at large.

Multiple studies of programs in both recessions confirm they allowed unemployed workers to continue buying needed goods and services and that without this aid, households would have fallen further behind and the economic recovery would have been weaker. 

A June 2020 study notes that consumer spending began to recover for all income groups as early as mid-April because of pandemic-era UI expansions and stimulus payments, but the recovery was faster for the bottom 25 percent of households. A subsequent study found that spending among the unemployed increased by 22 percent over their pre-job-loss baseline and declined by 14 percent when the FPUC supplement expired in July 2020. This study also found that unemployed workers doubled their liquid savings between March and July 2020 but spent two-thirds of these savings in August alone. The August 2021 comparison (PDF) of workers in states that ended benefits and those that didn’t found the former’s spending decreased by $145 per week, potentially hurting local economies.

This evidence is consistent with studies from the Great Recession on the effect of benefit extensions on household income and finances. One study found these extensions helped unemployed homeowners make house payments, preventing 1.3 million foreclosures. Families who had exhausted benefits were more likely to receive food assistance through the Supplemental Nutrition Assistance Program and live in poverty. At the macroeconomic level, extended UI benefits closed two-fifths of the shortfall in gross domestic product between mid-2008 and mid-2010, in the depths of the Great Recession.

The research makes clear that UI benefit extensions have played a major role in the economic recovery and in providing financial stability and economic security to unemployed people. However, with the economy and labor market in what appears to be a generally strong, if still uncertain and unevenly distributed, recovery, the same logic that justifies expanded UI benefits in worse times does suggest unwinding those measures in better times.

But is the abrupt expiration of programs on predetermined dates set in legislation or extensions that require congressional approval the most efficient or equitable way for the UI system to respond in recessions? We’ll consider this questions in our next post.

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