Study: States that cut federal unemployment benefits added jobs twice as fast
WASHINGTON (SBG) — Federal pandemic unemployment benefits ended for millions of jobless Americans Monday, creating mixed feelings about the future of the recovery.
While the expanded unemployment benefits provided a critical lifeline to people who lost jobs due to the pandemic, some economists argued the extra $300 weekly federal payments, on top of state unemployment benefits, disincentivized workers from rejoining the labor force. Federal relief programs also allowed people to receive benefits for up to 53 weeks, on top of 26 weeks of state benefits, on average.
Business leaders claimed the generous UI benefits were creating a worker shortage. Employers posted a record 10.1 million job openings in June, exceeding the number of unemployed Americans for the first time since the start of the pandemic. Meanwhile, the National Federation of Independent Business reported last week that a record 50% of small business owners had job openings they couldn't fill.
Twenty-six states tested the theory, ending their participation in the expanded federal unemployment programs between June and July in the hopes of filling open jobs and steering people back into the workforce.
Initial reports claimed that those states saw minimal or negligible job gains, but new studies suggest the job growth was more substantial.
A report by Michael Farren, a research fellow at George Mason University's Mercatus Institute, found the states that ended participation in federal UI programs experienced employment growth that was twice as fast as those that kept the programs intact.
The study was released after a disappointing August jobs report. The U.S. economy added just 235,000 jobs in August, about one-third of what economists expected. It also came as businesses continued struggling to find workers.
"A lot of pundits rushed out and said, 'Well, there's no effect, there's no story here everyone just move on," Farren said. He noted that even the research that claimed states saw minimal effects after ending the federal program showed a significant increase in employment compared to states that continued benefits.
A paper authored by economists and researchers at Columbia University, Harvard University, the University of Massachusetts Amherst and the University of Toronto showed states that withdrew from the federal unemployment benefits experienced 20% more job growth than the states that remained in the program.
However, those gains were offset by income losses to people no longer receiving jobless benefits. The study also found that 1.1 million people lost benefits in 19 states while only 145,000 of them found new jobs.
Another study by Goldman Sachs estimated workers' probability of finding a job would be driven entirely by those losing benefits, with job gains concentrated in low-wage leisure and hospitality jobs. The firm also analyzed worker behavior and found "clear evidence that benefit expiration increased the rate at which unemployed workers became employed."
According to its analysis, Goldman Sachs projected that ending federal UI benefits early would have added hundreds of thousands of jobs to the economy. Economists also projected that the expiration of benefits in September would account for 1.5 million job gains through the end of the year.
Other studies have shown negligible increases in unemployment in states that ended those benefits and increased hardship. The Economist found that people in cutoff states reported higher financial stress without the added benefit of more jobs.
Notably, a majority of the states that ended federal benefits early had unemployment rates below the national rate of 5.2%. Idaho, Nebraska, Utah, New Hampshire, South Dakota and Idaho were all below 3% unemployment.
It's still unclear how the expiration of federal unemployment benefits will impact the labor shortage. Farren emphasized that it will take another few months to see how and whether people return to the workforce. "The real issue is the September data collected next week," he said. "Will we see a surge of people trying to come back to work or will ... the states that ended in conjunction with the federal government also see a lagged effect of people not returning until November?"
President Joe Biden allowed the benefits to expire with little fanfare, encouraging states with persistently high rates of unemployment to use COVID relief funds to continue aid to the unemployed. So far, no state has announced plans to do that.
Some progressives in Congress have urged the Biden administration to extend relief as the delta variant continues to fuel new COVID-19 cases. Senate Finance Committee Chairman Ron Wyden, D-Ore., cited economic and health conditions to argue that "we shouldn't be cutting off benefits now."
