Eliminating Federal Unemployment Benefits Helped Economic Expansion

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The unemployment rate fell to 4.6% in October, reflecting the strong economic expansion that began in April 2020. The drop also reflects the anticipated end of federal unemployment benefit programs over the summer in 22 states and in all remaining states in early September. By October, the jobless rate had almost returned to the natural rate of 4.5%, according to the Congressional Budget Office (CBO).

The evolution of the labor market for the unemployed supports the idea of ​​an imminent return to high employment conditions, helped by the end of unemployment benefits linked to the pandemic. The initial jobless claims report for November 10 shows initial claims – not seasonally adjusted (NSA) – fell to 241,718 in the week ending October 30, down from the 251,851 recorded for the week ending March 14, 2020, just before the economy began to reflect the effects of the pandemic, including on employment. NSA data – the actual observed numbers for the economy – is used because the effects of the pandemic/recession on economic measures were unprecedented one-time events; appropriate seasonal adjustments are not possible. It was the second week in a row that continuing claims were lower than they were before the pandemic hit unemployment.

More importantly, the number of unemployed workers receiving regular unemployment benefits from the state fell to 1.9 million on an NSA basis in the week ending October 30. This was less than the 2.07 million continuing claims recorded in the pre-pandemic week of March 14, 2020, for the third consecutive week, and indicates that the effects of the pandemic/recession on unemployment have largely passed. The decline in continuing claims reflects a sharp acceleration in the pace of return to work.

Last summer, there was little discussion about the link between cutting federal emergency unemployment benefits and accelerating job gains. Isabel Soto of the American Action Forum estimated that around 47,000 people would find jobs due to the early end of benefits, but Commerce Secretary Gina Raimondo said there would be no effect on employment. At the time, about half of the states had ended federal payments early, and many analysts suggested the cut would accelerate the decline in regular claims for continuing benefits in those states. Federal officials have claimed that such measures have not accelerated the improvement in employment.

With the end of federal emergency programs, it is even clearer that this has accelerated the decline in continued claims for regular benefits. Federal unemployment compensation programs paying $600 a week ended at the end of July and were replaced by payments of $300 through early September. As a result, the number of continuing claims fell from 15.9 million in the week ending July 25 to 12.3 million in the week ending September 12, an average drop of 503,108 per week. for seven weeks. When those funds ran out, no federal payments were made for 15 weeks. The number of continuing claims for regular unemployment in the state fell another 7 million through the end of December, an average decline of another 468,654 per week.

In each case, a $300 weekly reduction in benefits reduced claimants by around half a million people per week, bringing the total reduction from end-July to end-December 2020 to 10.6 million – a reduction of 66, 3% unemployment benefits- receive workers in five months. This is dramatic proof that benefit cuts reduce the number of job seekers.

When 22 states announced the early elimination of federal payments in June and July, many of them again left the lists of continuing claims. From the week ending July 10 to the end of programs for the rest of the states on September 4, the state’s average weekly regular continuing claims outflow was 118,337. Over the following eight weeks, through September 30 October, when those states also ran out of federal benefits, the average weekly drop in continuing claims was 103,449. Compare these two periods with the rate of decline in the comparable 14 weeks before federal benefits were cut (early April to mid-July): the average weekly decline was only 45,586 per week – less than half the rate seen after the pandemic – the associated benefits ended.

There are two main confounders related to arguments that employment was not boosted when states cut federal benefits earlier. First, many people receiving federal benefits worked while receiving those benefits. A report on the effect of the end of federal benefits cited the struggles of a woman who had temporarily ended her efforts to start a motivational speaking business and worked part-time for a county government. The second element of confusion was that most of the states that ended federal benefits earlier had largely reached full employment conditions and saw no need for additional incentives that might be ineffective.

By my calculations, the average unemployment rate in May in states that ended federal benefits earlier was only 4.45% – essentially the CBO’s estimate of the natural rate, so little further improvement could be expected. Nevertheless, in these states, the average unemployment rate fell to 4.23% in August. The other states, where benefits continued through early September, had an average unemployment rate of 5.83% in May 2021, well above the natural rate. These states benefited more from the end of pandemic-related unemployment compensation in early September. Their unemployment rates fell to an average of 5.50 in August, about 43% higher than in the early states in the same two months.

Some analysts might think that the slowdown in real GDP growth in the third quarter is explained by the slowdown in employment growth. Real GDP in this quarter grew at a compound annual rate of 2%, compared to 6.7% in the previous quarter. The decline was largely due to a decline in productivity, falling to 4.8% in the business sector, from a 2.6% expansion rate in the second quarter. Productivity was generally exceptionally fast during the economic recovery until the summer.

The drop in productivity in the third quarter was consistent with anecdotal reports of supply chain bottlenecks and the lagged effects of soaring energy prices, as measured by the consumer price index. production of fuels and related products and electricity. Energy prices have risen at an annual rate of 50.2% since the end of the recession in the second quarter of last year.

John A. Tatom is a Fellow of the Institute for Applied Economics, Global Health and the Study of Business Enterprise at Johns Hopkins University.

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