End of US’s extra unemployment benefits gives little boost to labour market

The end of extra federal unemployment benefits for millions of Americans this month is unlikely to provide a significant boost to the US labour market, according to an analysis by the Financial Times and studies by economists and industry analysts. 

Before September’s expiry — which left more than 7.5m people without access to enhanced pandemic-related benefits — unemployed people had this year received an extra $300 per week from the federal government in addition to state aid.

The federal benefits have been politically divisive, with many Republican leaders arguing they have dissuaded people from returning to the workforce and fuelled a nationwide labour shortage that has inhibited the economic recovery.

In June, 22 states withdrew the supplemental payments — a number that rose to 26 by midsummer — creating a sort of natural experiment given that the other states kept them in place.

An FT analysis of monthly data from the US Department of Labor shows that states that ended benefits early did not report faster job growth than those that opted to keep additional aid flowing. Non-farm payrolls rose by about 1.3 per cent in both sets of states from May, when the bulk of the states laid out their plans to abandon the federal programme, to August.

“The view that unemployment benefits were restraining labour supply and labour growth is completely misguided,” said Gregory Daco, chief US economist at Oxford Economics. “It was certainly one factor but it is not the only one.”

For most of 2020, the federal top-up was $600 a week, with “gig” workers and other self-employed or part-time individuals also receiving assistance alongside those with health-related employment constraints.

In total, the support had amounted to $850bn between March 2020 and August 2021, according to Peter Williams at investment firm Evercore.

The nationwide benefits expiry occurred at a pivotal moment for the labour market recovery. A string of strong jobs reports was cut short in August, when only 235,000 positions were created.

That was a significant deceleration compared with the roughly 1m jobs added in both June and July, intensifying the spotlight on what is holding people back from returning to work.

Some studies have shown that slashing the enhanced benefits early did marginally increase the rate at which unemployed people returned to work. But economists caution that any effects are at best modest and likely temporary, suggesting the acute labour shortage that has held back the jobs recovery may be difficult to overcome.

Jed Kolko, chief economist at the jobs website Indeed, analysed the federal jobs data and found that unemployment from May to August had fallen slightly faster in states that had cut off the federal benefits than elsewhere.

But the gap was closed by simultaneous job gains in states that kept aid in place. There, the increases came from people who were outside of the labour force — people who were not working and not actively looking for work — rather than the unemployed.

Teenagers, for instance, played a significant role in filling open positions in these states. Arindrajit Dube, an economics professor at the University of Massachusetts, found that in July, this group found jobs at almost twice the rate as those in states that kept benefits.

Bar chart showing the composition of where employment growth came from in the 26 states that ended federal unemployment benefits vs other states. The two sets of states saw nearly identical employment gains but in states that ended benefits early, the data suggests that most of the jobs were filled by those who were previously unemployed, while in other states most of the jobs were filled by those who were previously outside of the labour force

One fear is that some states will suffer from a “congestion effect”, according to Dube, in which formerly unemployed people fill jobs that might have been filled by people entering the labour force.

“You’re kind of substituting who is getting the job, in part, as opposed to just creating more jobs,” he said, leading to a “wash” in terms of the employment impact.

In a recent paper examining anonymous banking records of more than 18,000 low-income workers who were receiving unemployment benefits in April, a team led by Kyle Coombs of Columbia University and Dube also found only a small difference in hiring for states that ended federal benefits early.

By August, 22 per cent of the people studied had taken a job in states that kept the federal insurance in place, compared with 26 per cent that had cut it off.

Rather, other factors are complicating a return to work. States that scrapped the federal programme early have suffered disproportionately from the alarming spread of the Delta coronavirus variant. In August, these states reported job losses in the leisure and hospitality sector, while hiring for those positions increased elsewhere.

Line chart showing the trajectory of payroll growth in the Leisure and Hospitality sector (indexed to May 2021) through August 2021 for the 26 US states that ended federal unemployment benefits early vs other states. In August employment actually fell in the states cutting off benefits, while they grew slightly elsewhere

“It is probably real-life circumstances and pandemic-related changes to everyday life that are preventing a lot of people from returning,” said James Sweeney, chief US economist at Credit Suisse. “We are going to need lower infections and people feeling less pandemic risk for labour supply to change in a meaningful way.”

Loretta Mester, president of the Federal Reserve Bank of Cleveland, flagged earlier this month that childcare difficulties were likely to be holding people back. School reopenings should help to alleviate those constraints, she said, setting the stage for further labour market gains.

Reflecting the limited labour market impact from the unemployment benefits expiring, Williams at Evercore forecasts that at most 200,000 to 250,000 additional jobs will be created per month in the near-term now that this additional aid has lapsed.

Economists are now left grappling with the potential impacts of reducing support when 5.3m more Americans are out of work than before the pandemic.

“The expiry of these benefits could end up doing more damage for families’ finances than good for their employment situation,” Daco warned.

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