Expanded unemployment benefits that paid many people more for staying at home than they received at their jobs prolonged the struggling job market and reduced employment, according to a new study by the Federal Reserve Bank of St. Louis.
These findings suggest that the federal unemployment insurance programs, extended through September 2021 by Democrats’ American Rescue Plan Act in March 2021, exacerbated the unstable economy Americans are experiencing today.
The CARES Act, passed in March 2020, included enhanced unemployment insurance benefits by adding a $600 federal weekly supplement to existing state benefits. The bill also expanded eligibility for benefits. Democrats’ March 2021 American Rescue Plan, which was passed while the economy was already in recovery, extended these benefits with a $300 federal weekly supplement and increased the number of weeks an individual may claim benefits from 39 to 50.
The working paper, authored by Iris Arbogast and Bill Dupor, studied the effects of the expansion of unemployment insurance during the pandemic. Starting June 2021, 18 states opted out of these programs (the Federal Pandemic Unemployment Compensation program and the Pandemic Unemployment Assistance program), allowing researchers to see, through comparison, how these benefits impacted employment.
The study found that for every 100-person reduction in beneficiaries for states who opted out early, employment increased by 35 people:
“Our outcome variable is the state-level three month change in employment. In our benchmark specification, we estimate that in the three months following a state’s EUB termination, for every 100-person reduction in beneficiaries driven by program termination, employment increases by roughly 35 persons. Thus, there was a strong, rapid jobs response to the reduction in EUB rolls resulting from the end of emergency benefits.”
The study also found that, if every state opted out of UI benefits early – a “nationwide cessation policy” – then employment would have increased by 1.6 million people:
“Since pre-pandemic employment was roughly 150 million, the estimate implies that a nationwide cessation policy would have increased employment by 1.6 million persons relative to a no-cessation counterfactual.”
This study is consistent with a December 2021 paper in the National Bureau of Economic Research. The NBER study, authored by Harry J. Holzer, R. Glenn Hubbard, and Michael R. Strain, found that states who opted out of UI benefits experienced a 0.8 percent higher unemployment rate in July and a 0.7 percent higher unemployment rate in August than they would have if they suspended benefits. The NBER paper also found that in states that terminated the program early, the flow of unemployed workers into employment increased by two-thirds. Finally, the paper concluded that if every state had opted out of UI programs in June, the national unemployment rate in July would have been around 0.3 percentage point lower.
Researchers found similar trends while studying unemployment benefit expansions under the Obama Administration. On the heels of the Great Recession, Congress extended unemployment benefits for 13 weeks on top of the normal 26-week duration in June 2008. After President Obama took office, Congress passed several additional expansions to unemployment, eventually topping out at 99 weeks of benefits. Analysts from the New York Federal Reserve estimated that the unemployment rate would have been 2.2 percentage points lower in 2011 and 3 percentage points lower in 2010 if Obama’s benefit expansion did not exist. This means that the disincentive to work the benefit expansion created kept approximately 4 million Americans out of a job during the slowest economic recovery in modern history.
Despite ample, growing evidence that massive welfare programs have negative effects on employment, Democrats continue to push for these kinds of policies.
Even during high inflation and the economy teetering toward recession, Democrats are still proposing an expansion of welfare programs like “free” childcare, federal paid family leave, and converting the child tax credit (CTC) into a monthly refundable payment.
Finding and keeping a job is the best way for families to live comfortably and happily — discouraging employment is neither virtuous nor fiscally sound. Clearly, these kinds of policies do more harm than good.