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 National Bureau of Economic Research working paper.
These findings suggest that the federal unemployment insurance programs, extended through September 2021 by Democrats’ American Rescue Plan Act in March 2021, have exacerbated the supply chain crisis and unstable economy Americans are experiencing today.
The working paper, authored by Harry J. Holzer, R. Glenn Hubbard, and Michael R. Strain, studied the effects of the expansion of unemployment insurance during the pandemic (FPUC) and the expansion of who qualifies for those benefits (PUA).
Starting June 2021, 18 states opted out of these programs, allowing researchers to see, through comparison, how these benefits impacted employment.
The authors presented difference-in-difference and event study estimates showing that the benefits reduced employment. Specifically, states that continued to participate in additional unemployment benefit programs (FPUC and PUA) 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:
“We use these estimates in a simple counterfactual exercise to examine what the unemployment rate and employment-population ratio might have been if the 24 states and the District of Columbia that participated in FPUC and PUA through September had instead opted out in June. In those states, workers ages 25-54 would have had an unemployment rate 0.8 percentage point lower in July and 0.7 percentage point lower in August. Employment rates would have been 0.7 percentage point and 0.6 percentage point higher in July and August, respectively.”
Additionally, in states that terminated the program early, the flow of unemployed workers into employment increased by two-thirds:
“Using Current Population Survey data, we present difference-in-difference estimates that the flow of prime-age unemployed workers into employment increased by around 14 percentage points following early termination, or about two-thirds the size of the unemployed-to-employed flow among control states during the February-June 2021 period.”
Further, 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:
“We construct a counterfactual scenario for the labor market under the assumption that all states ended FPUC and PUA in June. In this scenario, the unemployment rates in each of July and August would have been around 0.3 percentage point lower, and the employment-population ratio would have been 0.1-0.2 percentage point higher.”
Importantly, the study also explains that there is no evidence to suggest that the expanded unemployment benefits increased Americans’ welfare, describing welfare implications as “ambiguous.”
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 supply chain crisis, Democrats focused on expanding welfare programs in their reconciliation bill such as “free” childcare, federal paid family leave, and converting the child tax credit (CTC) into a monthly refundable payment. The Democrats’ CTC proposal did not have a work requirement even though the program would send cash to recipients. 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.