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What are the consequences of unemployment benefits ending according to data?

Over half of US states will end unemployment benefits early, but data suggests that the move isn’t producing the desired effect and could cost those states.

Over half of US states will end unemployment benefits early, but data suggests that the move isn’t producing the desired effect and could cost those states.

Elected officials across the US are moving to end enhanced federal unemployment compensation arguing that its disincentivizing people from looking for work. Those benefits have already ended in 22 states removing a lifeline for millions of Americans. What will the consequences of the move be?

As the covid-19 pandemic set in last year the US Congress moved quickly to shore up household finances with unprecedented monetary assistance. That included beefing up unemployment benefits that not only kept families afloat but also local economies. Included were jobless aid for the self-employed and others that normally wouldn’t qualify for unemployment insurance, as well as a $300 booster to all unemployment recipients.

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Federal Pandemic Unemployment Compensation (FPUC) program

The push to end enhanced unemployment compensation has been led by Republican governors and lawmakers blaming the added financial assistance for keeping people at home instead of reentering the job market. They say that the benefits are overly generous and that businesses can’t offer salaries to compete with what workers are receiving each week in jobless aid.

Unemployment compensation typically covers on average around 41 percent of what a worker would receive prior to being laid off, but varies widely around the US. The CARES Act greatly increased what unemployed workers would receive by adding an additional $600 to weekly payments through the Federal Pandemic Unemployment Compensation (FPUC) program. The weekly booster faced resistance from the get go but with the dire consequences of not getting relief to the US economy and households quickly the measure made it through Congress allowing those who were laid off to receive nearly the full amount of their salary prior to being put out of work.

That weekly extra money has been extended three times over the past year but has also been cut in half. Now those out of work can receive a supplemental $300 per week where the benefit has not been stopped. The American Rescue Plan extended the extra weekly FPUC cash until 6 September when it will most likely expire for good.

Stopping unemployment benefits not having the desired effect

The primary argument for cutting off the weekly additional $300 unemployment benefit is that it disincentivizes people from returning to the work force. However, preliminary data and research counter that reasoning.

Although the US Bureau of Labor Statistics May jobs report gave data prior to the first states ending their participation in the unemployment insurance programs on 12 June, those states showed lackluster numbers. State governors began announcing that they would end enhanced unemployment payments in early May but their states didn’t show a noticeable uptick in people reentering the labor market and actually had lower job search numbers than other states.

This would back up research done on the effects of the extra weekly cash done last year and updated recently by the Federal Reserve Bank of San Francisco that found the booster had a “small but noticeable” impact at the beginning of the year. “The estimated impact of the $300 supplement [was] 0.035,” the research found. To put that into perspective “about seven out of 28 unemployed individuals receive job offers that they would normally accept, but one of the seven decides to decline the offer due to the availability of the extra $300 per week in UI payments.”

Cutting benefits could cost local economies billions of dollars

A report from Congress’s Joint Economic Committee found that cutting unemployment benefits early could cost local economies over $13 billion. The report was based on an analysis of 25 states that had announced they would be ending benefits before the 6 September expiration date. There are currently 26 states that will end jobless financial assistance early with a handful of legislatures pushing for their states to end the $300 unemployment benefit.

The report stated that unemployment insurance “has played an important role in the recovery by stabilizing consumption and keeping jobseekers from dropping out of the labor force entirely.” The jobless aid ensures that workers can continue to meet their basis needs and “provides liquidity constrained displaced workers with the breathing room they need to find a better-paying job that matches their skills, experience and family demands.”

According to studies when a worker loses his or her job “food or nondurable consumption declines between 6 and 9 percent,” and once the financial assistance ends “consumption can drop by up to 12% on average.”