About half of US states—mostly run by Republican governors—cut off extended unemployment benefits months before the federal government was planning to end them on Labor Day last year, convinced workers would flood back to employers who were desperate to hire. But for every five workers who lost benefits in June, just one found a job by early September, research shows.
Pulling the COVID-19-related benefits early created fewer jobs than many government officials predicted. Meanwhile, many people—both those who returned to work and those who didn’t—cut back on spending. Ultimately, the early stop to unemployment benefits slashed the incomes of the vast majority of those who were cut off and crimped overall spending in local economies, says Raymond Kluender, an assistant professor in the Entrepreneurial Management Unit at Harvard Business School.
“The cost of early withdrawal was a significant loss of benefits and spending,” says Kluender, who coauthored the recent working paper Early Withdrawal of Pandemic Unemployment Insurance: Effects on Employment and Earnings with HBS research associate Calvin Jahnke; Kyle Coombs and Suresh Naidu of Columbia University; Arindrajit Dube of University of Massachusetts, Amherst; and Michael Stepner from the University of Toronto.
“The smaller-than-expected response begs the question of why so many people still haven't returned to the labor force,” Kluender says.
Probing the spending of unemployed people
Earnings generated by the 1.1 million new jobs that were created in early-withdrawal states totaled roughly $900 million. Yet some 3 million workers lost $7.6 billion in benefits—cash that no longer flowed into state economies—the researchers found, citing US Department of Labor statistics.
To focus on those who might be most likely to seek work once benefits ended, the authors examined a sample of low-income workers who typically have limited access to credit. Using detailed banking data from Earnin, a financial services company that offers workers access to their wages ahead of payday, researchers examined a sample of almost 16,000 people unemployed at the end of April 2021 who received federal benefits through the CARES Act of 2020. The authors analyzed anonymized bank transaction data from January 1 through September 17, 2021.
Researchers then compared the accounts of people who live in states that ended pandemic unemployment benefits in June with those from the states that continued benefits until September. Withdrawing benefits early boosted hiring by 6.8 percent, the researchers write. In addition, the roughly 1.1 million jobs that were created in states that withdrew before the deadline would have likely materialized a month or two later if those governors had opted to keep distributing the federal benefits, Kluender says.
Unemployment insurance flowing into accounts dropped by $281.50 per week by early September. Yet earnings for those that landed jobs rose just $38.30 per week. That offset a mere 14 percent of the lost benefits, the researchers found.
No easy answers to worker shortages
So what’s the answer amid a persistent labor shortage—with millions of workers quitting their jobs in what’s become known as the Great Resignation?
“People hoped removing expanded UI would be some kind of silver bullet for addressing the worker shortages that we've experienced over the last year and a half,” Kluender says. “It turns out that UI benefits were only a small piece of the puzzle.”
A deeper examination of Earnin data may yield clues, Kluender says. He and other researchers are now looking at the role that savings may play in a person’s decision to return to work, for instance.
“It raises the question: What are the other things that are holding people back from employment?” Kluender says. “We're working on a number of things around trying to understand the role that cash-on-hand and other factors play into workers’ decisions to go back to work.”
The complex cost-benefit analysis for workers
How much savings a person has or whether someone has children may be factors. Using more detailed and widespread analysis of how people use their money could lead policy makers to better target aid—and ultimately get people back to work.
This research may help policymakers decide how to implement any future emergency benefits that are knit into the broader economy, yielding better tools to handle the next economic downturn, Kluender says.
"This is unlike any recession that we've ever experienced. It's been very hard to wrap your head around,” Kluender says. “There are a ton of questions we're just starting to scratch the surface on understanding.”
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