Harry J. Holzer, Michael R. Strain, R. Glenn Hubbard, "Did Pandemic Unemployment Benefits Reduce Employment? Evidence from Early State-Level Expirations in June 2021," National Bureau of Economic Research Working Paper no: 29575, https://www.nber.org/papers/w29575
Unemployment benefits are a key feature of the modern welfare state in the west. These benefits are seen as absolutely necessary to help people who loose their jobs during unforeseen crises such as the coronavirus pandemic that struck the world in 2020. The Federal Pandemic Unemployment Compensation (FPUC) and the Pandemic Unemployment Assistance (PUA) were two Government programs that were used to extend unemployment benefits in the United States as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act of March 2020. The FPUC was used to increase the amount of benefits given to the unemployed while the PUA allowed more groups of people to be covered by unemployment assistance. The FPUC gave an additional help of $600 per week to the unemployed.
The debate around unemployment benefits
A major criticism of unemployment benefits in general, however, has been that they discourage the beneficiaries from looking for new work. After all, when a steady paycheck keeps coming home without any effort, one could suppose that the incentive for the unemployed to actively look for a new job would drop quite significantly. This not only causes an increase in the tax burden on the rest of society that must fund these benefits, but also adversely affects the overall economic output of society as the size of the economy’s working population shrinks. Such concerns led many American states to withdraw the benefits offered to the unemployed in the wake of the pandemic under the PUA and FPUC. Notably, the States that withdrew unemployment benefits offered under PUA and FPUC did so some months before the official expiry of these programs. The unemployment benefit programs were supposed to expire by September 2021, but 18 states decided to withdraw them by June 2021 itself.
Some economists, however, have contested the claim that unemployment benefits increase unemployment by discouraging people from looking for work. They cite various empirical studies to support their case. So, do unemployment benefits really make people more likely to stay unemployed?
“Did Pandemic Unemployment Benefits Reduce Employment? Evidence from Early State-Level Expirations in June 2021” by Harry Holzer, Glen Hubbard and Michael Strain studies this question in the context of the coronavirus pandemic. The pandemic caused a sharp rise in the number of unemployed in the United States, pushing the nation’s unemployment rate to 14.8% in April 2020. This turned out to be the highest unemployment rate recorded since unemployment data in the U.S. began to be collected in 1948, and much higher than the unemployment rate of around 10% reached during the Great Recession.
According to the authors, a total of 26 States prematurely opted out of either the FPUC or the PUA before these programs were supposed to expire in September 2021. Out of these 26 States, 18 States opted out of both the FPUC and the PUA by June 2021. The study focuses particularly on these 18 States to gauge the effect of unemployment benefits on employment. It uses the Current Population Survey (CPS) data released jointly by the U.S. Census Bureau and the U.S. Bureau of Labor Statistics.
Overall, the authors estimate that the U.S. national unemployment rate would have been 0.3 percentage point lower than what it was in July and August of 2021 if all States had withdrawn unemployment benefits in June. They also estimate that the employment to population ratio would have been 0.1 to 0.2 percentage point higher. Further, they found that the pace at which unemployed people moved into employment rose by two-thirds when compared to an earlier period after these States terminated the two unemployment benefit programs. In particular, among the unemployed between the ages of 25 to 54, there was a 14 percentage point increase in movement from unemployment to employment. Finally, the authors also found that the quick transition from unemployment to employment did not happen in other States which did not end unemployment benefits until September 2021. All these results are not surprising since, as the authors note, the unemployment benefits offered to about 76% of eligible workers during the pandemic exceeded the wages these employees lost when they lost their jobs. It is natural then for most people receiving unemployment assistance to delay looking for new work.
So, to conclude the authors argue that the unemployment benefits offered to help people who lost their jobs during the pandemic may have delayed the transition from unemployment to employment. They also note that American households with greater confidence in their ability to meet their expenses may have been less affected by the withdrawal of the unemployment benefits. However, the early termination of unemployment programs led to a drop of 5% in the share of households that had confidence in their ability to meet their expenses, the authors note. So they caution that the overall effect of scrapping unemployment benefits on the welfare of households is not so straightforward.