Moneybox

Cutting Off Unemployment Benefits Didn’t Fix the Economy, It Turns Out

A sign that says "Now Hiring, Work Today, Get Paid Tomorrow" in the window of a Del Taco in Los Angeles
Still rough out there for a hiring manager. Mario Tama/Getty Images

It’s still a little bit early to draw final conclusions, but so far, it seems that cutting off unemployment benefits for millions of Americans in the middle of a public health emergency hasn’t led to a surge of job seekers, despite the expectations of the many business owners and conservative politicians who demanded it.

As part of the massive coronavirus relief bill they passed earlier this year, Democrats extended a fleet of federal unemployment programs, offering an extra $300 a week on top of normal benefits while allowing recipients to collect aid into the fall. But heeding the call of employers who insisted the payments were discouraging people from looking for jobs, dozens of mostly Republican-led states opted over the summer to drop out early from the programs, which then expired entirely at the start of September.

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The hiring boom many seemed to expect has yet to materialize. Job growth actually skidded in August, despite the fact that 26 states had already cut off federal aid. Employers added just 235,000 workers to their payrolls, and the leisure and hospitality industry, which had arguably complained loudest about the effect of UI on hiring, tacked on precisely zero. Surveys from Indeed.com suggest that online job searching has yet to meaningfully pick up and Bloomberg reports that applications in the restaurant sector have actually declined in each of the last nine weeks. Meanwhile, employment hasn’t grown any faster overall in states that decided to drop out of the UI programs early than in the ones that continued them into September, as illustrated in this chart from the Financial Times:

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Chart showing employment rising at roughly the same rate in states that cut UI early and those that didn't
Colby Smith and Christine Zhang of the Financial Times
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It’s not that the country’s restaurant and hotel proprietors were entirely imagining things when they said generous unemployment benefits were making it harder to hire. The availability of generous aid clearly took the pressure off some Americans to look for work, and in a June survey from Indeed.com, 10 percent of those who were unemployed but not urgently looking for a job cited UI as a reason. A paper by economists at the University of Chicago and the JPMorgan Chase Institute, which used hundreds of thousands of individual bank records to look at the effects of UI on job-finding, concluded that the $300 weekly benefits decreased total employment by about 0.5 percent.

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Research also suggests that cutting off benefits did spur more job hunting. A study by Goldman Sachs found that the unemployed were 6 percentage points more likely to find a job in states that cut off benefits early. A paper by economists Kyle Coombs, Arindrajit Dube, and others suggested that the end of the pandemic programs increased employment by about 4.4 percentage points through August. Goldman’s team predicted that, as a result of the federal programs expiring in September, the country would add 1.5 million extra jobs through the end of the year; Coombs and Dube suggested we could expect a more modest half-million extra, spread over September and October.

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But again, when you step back back and look at the big picture, ending these support programs simply hasn’t been a magic fix for the labor market. And in the end, states that opted out early have landed roughly in the same place as those that didn’t. Insofar as cutting off the flow of government aid gave the labor market a jolt, the effect hasn’t been powerful enough to see it clearly with the naked eye.

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But why? The most obvious issue is that the delta wave is to some extent just swamping everything else in the economy at the moment, and many states that bailed on the federal programs had some of the worst outbreaks (see: Florida). There’s also some evidence that, rather than hire more workers overall, businesses in states that cut off unemployment benefits early simply began to hire fewer teens, who’d been acting as a sort of backup labor force, and more older workers (as a result, ending UI might have had a bigger impact on individuals than on the economy overall). Meanwhile, as Glassdoor economist Daniel Zhao pointed out to Bloomberg, it’s possible that a lot of Americans are still living on savings, since many hospitality workers earned more on UI than at their old jobs; if that’s the case, it’s possible we’ll finally see hiring speed up later this year as those financial cushions run out.

But in the meantime, the simple story that unemployment insurance was the gravitational force pinning down the labor market and preventing a boom doesn’t seem to have panned out. And as for the states that decided to cut off aid early? That decision is looking increasingly pointless and cruel.

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