Eliminating federal unemployment benefits has promoted economic expansion
The unemployment rate fell to 4.6 percent in October, reflecting the strong economic expansion that began in April 2020. This decline also reflects the early ending of federal unemployment compensation programs over the summer in 22 states, and in all remaining states in early September. By October, the unemployment rate was nearly back to the natural rate of 4.5 percent, according to the Congressional Budget Office (CBO).
Labor market developments for the unemployed support the view of an imminent return to high-employment conditions, aided by the end of pandemic-related unemployment benefits. The initial unemployment compensation claims report for Nov. 10 shows that initial claims — not seasonally adjusted (NSA) — fell to 241,718 in the week ending Oct. 30, lower than the 251,851 registered for the week ending March 14, 2020, just before the economy began to reflect the pandemic’s effects, especially on employment. NSA data — the actual numbers observed for the economy — are used because the pandemic/recession effects on economic measures were unprecedented one-time events; proper seasonal adjustments are not possible. This was the second week in a row that continuing claims were lower than before the pandemic hit unemployment.
More significantly, the number of unemployed receiving regular state unemployment compensation fell to 1.9 million on an NSA basis in the week ending Oct. 30. This was less than the 2.07 million continuing claims registered in the pre-pandemic week of March 14, 2020, for the third week in a row, and indicates the pandemic/recession effects on unemployment are largely past. The decline in continuing claims reflects a sharp acceleration in the pace of people returning to work.
Last summer there was limited discussion of the connection between reduced emergency federal unemployment compensation payments and accelerated employment gains. The American Action Forum’s Isabel Soto estimated that about 47,000 people would return to employment because of the early end to benefits, but Secretary of Commerce Gina Raimondo claimed there would be no effect on employment. At the time, about half of states had ended the federal payments early, and many analysts suggested this cutback would accelerate the decline in regular continuing claims for benefits in those states. Federal officials claimed that such moves did not accelerate improvements in employment.
With the end of the emergency federal programs, it is even more clear that this accelerated the decline in continuing claims for regular benefits. Federal programs for unemployment compensation paying $600 per week ended at the end of July and were replaced by $300 payments until 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 Sept. 12, an average decline of 503,108 per week for seven weeks. When these funds ran out, no federal payments were made for 15 weeks. The number of continuing claims for regular state unemployment fell another 7 million until 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 about a half-million persons per week, bringing the total reduction from the end of July to the end of December 2020 to 10.6 million — a reduction of 66.3 percent of unemployment benefit-receiving workers in five months. That’s dramatic evidence that benefit reductions reduce the number of unemployed claimants.
When 22 states announced the early elimination of federal payments to take place during June and July, large numbers again left the continuing claims rolls. From the week ending July 10 to the end of the programs for the rest of the states on Sept. 4, the average weekly exit from regular state continuing claims was 118,337. For the next eight weeks, until Oct. 30, when those states also no longer had federal benefits, the average weekly decline in continuing claims was 103,449. Compare those two periods with the pace of decline for the comparable 14 weeks before federal benefits were cut off anywhere (early April to mid-July): The average weekly decline was only 45,586 per week — less than half the rate that occurred after pandemic-related benefits ended.
There are two central items of confusion related to arguments that employment was not boosted when states cut off federal benefits early. First, many people on federal benefits were employed while drawing those benefits. One report on the effect of ending federal benefits cited the hardship for a woman who had temporarily ended her efforts to start a motivational speaking business and was working part time for a county government. The second item of confusion was that most states that ended federal benefits early largely had achieved full employment conditions and saw no need for additional incentives that were likely to be ineffective.
According to my calculations, the average unemployment rate in May in the states that ended federal benefits early was only 4.45 percent — essentially the CBO estimate of the natural rate, so little more improvement could be expected. Nevertheless, in these states the average unemployment rate fell to 4.23 percent by August. The other states, where benefits continued to early September, had an average unemployment rate of 5.83 percent in May 2021, well above the natural rate. These states benefited more from ending pandemic-related unemployment compensation in early September. Their unemployment rates fell to an average of 5.50 by August, about 43 percent more than in the early states over the same two months.
Some analysts might think a slowing in real GDP growth in the third quarter was because of slower employment growth. Real GDP in that quarter grew at a 2 percent compound annual rate, down from 6.7 percent in the previous quarter. The decline was largely because of a decline in productivity, falling at 4.8 percent in the business sector, down from a 2.6 percent rate of expansion in the second quarter. Productivity generally had been unusually rapid during the economic recovery until the summer.
The third-quarter decline in productivity was consistent with anecdotal information on supply chain bottlenecks and the lagged effects of the large increase in energy prices, measured by the producer price index for fuels and related products and power. The price of energy has increased at a 50.2 percent annual rate since the recession ended in the second quarter of last year.
John A. Tatom is a fellow at the Institute for Applied Economics, Global Health and the Study of Business Enterprise at Johns Hopkins University.
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