Research shows that cutting unemployment insurance benefits led to job gains
When I wrote in the Star Tribune in April that ‘enhanced’ unemployment benefits were one factor explaining the puzzle of record job openings coexisting with elevated levels of unemployment, not everyone agreed. One response claimed that I asserted:
…with no evidence that it is the increased unemployment benefits that are keeping workers at home. In at least two articles in the past few weeks the same assertion has been made, again with no evidence. Employers are quoted but not workers.
Another argued that I claimed:
…that you can’t entice people to take jobs that pay less than unemployment benefits yet offers no data to support this.
…
Neither of us has any hard data to draw upon…
Further evidence comes as states end these payments at different dates. If these payments were holding back job growth then we should see that in the relative labor market performances of the states. Examining the evidence, economist Noah Williams notes that “cutting unemployment insurance (UI) benefits led to job gains.”
Williams notes that:
…the unprecedented economic upheaval and volatility during the pandemic made it hard to isolate the role of unemployment benefits from other factors. Indeed, early economic studies failed to identify an effect on employment of the enhanced benefits through the summer of 2020.
That has changed, though, as, starting in May, states have reopened their economies and taken different paths on ‘enhanced’ and extended unemployment benefits (Minnesota is keeping them in place for as long as possible):
While it is still early, the results of the experiment are starting to roll in. The first signs of an effect came in unemployment claims, which rapidly declined in the states ending enhanced benefits. While the termination of the federal programs extending the duration and eligibility for unemployment directly led to fewer workers on the total unemployment rolls, the terminating states also saw a sharp reduction in workers on the regular state UI system. The eligibility for these programs was not directly affected by the termination, but saw a cut in the UI benefit amounts only with the end of the $300 per week federal top-up. Between June 5 and July 17, the first four states (stopping benefits on June 12) saw a reduction of 26.3 percent in continued unemployment claims, while the next eight states (ending benefits on June 19) saw a 15.1 percent reduction, while continued claims in the rest of the nation fell only 0.1 percent. The relative declines in unemployment occurred in the weeks around the benefit expiration, consistent with previous research showing that reemployment rates are relatively constant over the duration of an unemployment spell but rise sharply around benefit expiration.
…And evidence is now emerging that the termination of the enhanced federal benefits has led to a modest boost in employment. Data on employment are less widely available, and constitute a short, noisy sample. But comparing the 22 states that ended benefits in June with rest of the U.S., and comparing the growth rates in the two months after the announcements with the prior two months, offers some evidence on the impact of the policy change.
Williams sums up by saying that:
Across all indicators, I find that the terminating states experienced improved labor market outcomes compared with the rest of the U.S. In these states, employment growth accelerated by more (in both household and payroll surveys) and the labor force grew more rapidly. The relative gains in private employment were even more than in total employment, and employment growth in the leisure and hospitality sector was especially strong. This sector was hit hard by the Covid-19 recession and, due to its low average wages, was likely most affected by the disincentive effects of enhanced unemployment benefits.
These ‘enhanced’ and extended payments will end on Sept. 4 in Minnesota.