Research finds that extended and ‘enhanced’ unemployment benefits reduced employment
The American Rescue Plan, enacted in March 2021, extended previous measures that expanded eligibility for Unemployment Insurance (UI) benefits to workers who are typically ineligible for state UI programs (Pandemic Unemployment Assistance; PUA) and that expanded the generosity of standard benefits. The latter program, Federal Pandemic
Unemployment Compensation (FPUC), added a $300 weekly supplement to standard state UI benefits from the law’s passage in March 2021 until Sept. 6, 2021. As I wrote in April:
What this means in Minnesota is that, with the initial enhancement, unemployed Minnesotans were able to collect a maximum weekly benefit of $1,340 and now get up to $1,040 — the equivalent of $33.50 an hour and $26 an hour.
University of Chicago economist Peter Ganong argued that even with the supplemental benefit halved to $300, “42 percent of [unemployed] workers are making more than their pre-unemployment wage.” Like many others, I argued that this would hold back employment growth:
If unemployment insurance offers people an income comparable to working — or even greater — many of them will quite sensibly opt not to work.
Such concerns led 26 states to opt out of at least one of these programs before it was set to expire in September 2021. New research suggests that this concern was well founded.
In a paper for the NBER titled ‘Did Pandemic Unemployment Benefits Reduce Employment? Evidence from Early State-Level Expirations in June 2021,’ economists Harry J. Holzer, R. Glenn Hubbard, and Michael R. Strain analyze the data to “estimate the effect of early termination of pandemic-era UI benefits on flows from unemployment to employment.” They find that “the flow of unemployed workers into employment increased by around two-thirds following early termination.”
“…construct a counterfactual scenario that implies the national unemployment rate in each of July and August would have been around 0.3 percentage point lower than they were, and the employment-population ratio would have been around 0.1-0.2 percentage point higher than it was, had all states ended FPUC and PUA in June. Expanded eligibility and generosity of UI may have both slowed transitions from unemployment to employment.”
That is not to say that there were not problems associated with early termination. The authors find that “early termination reduced the share of households that had no difficulty meeting expenses by five percent.” But on the question of whether or not extended and ‘enhanced’ unemployment benefits reduced employment, this evidence is clear.