- A new study suggests bolstered unemployment benefits did more good than models had predicted.
- UI supplements drove stronger spending and kept more Americans in the labor force, the paper said.
- The findings suggest similar fiscal aid could become a more regular tool during economic downturns.
- Visit the Business section of Insider for more stories.
The federal government kicked in a lot more money to people on unemployment from April through July of last year, and again starting last September, and now the experts are starting to pick over the findings.
A new study conducted by researchers at the University of Chicago and the JPMorgan Chase Institute found the extra aid actually defied experts’ models and played a larger role than expected in not just keeping Americans solvent, but in padding the labor market, too.
Relief packages passed throughout the coronavirus pandemic have boosted unemployment insurance by varying degrees as the government has looked to keep jobless Americans afloat. Models based on past recessions suggest the benefits do little to aid the economy, but the nature of the COVID-19 recession flipped the script, researchers said.
For one, the use of expanded UI led spending by unemployed Americans to increase following job loss. The weekly payments drove a large marginal propensity to consume – or tendency to spend – whereas a drop in spending was usually seen among the newly unemployed in past downturns. Even homes that saved previous UI payments maintained robust spending activity, the researchers said.
An improved marginal propensity to consume is a boon for a struggling economy. Consumer spending makes up 70% of economic activity in the US, meaning a pickup in spending plays a major role in accelerating overall growth – and in hiring, too. The federal government sending money to unemployed people likely created new jobs, the study found.
To be sure, the team’s findings begin with the CARES Act’s $US600 ($771)-per-week UI supplement. Spending sharply fell after the $US600 ($771) boost expired in July but picked up again when the government approved a $US300 ($386)-per-week expansion in September, the researchers said.
Democrats are now working to pass a $US1.9 ($2) trillion stimulus measure that would bring back this benefit at $US400 ($514) per week and keep it in place through August.
Staying in the force
The pandemic-era UI addition also bucked precedent in job-search trends, according to the study.
Past research suggests the availability of UI supplements leads unemployed Americans to search very little or not at all for a new job. When the UI boost expires, job-search activity then rises to pre-supplement levels, the team said, citing UI research by Nobel laureate Dale Mortensen.
Following the approval of larger benefits, the decline in job searches was “much smaller than predicted by the baseline model,” the researchers said. The large increase in job recalls – where employees are called back to work as business reopens – could contribute to the decline, according to the study.
The rate of Americans leaving their jobs also fell to extremely low levels during the pandemic, suggesting the cost of looking for work was much higher than in non-pandemic recessions. This higher cost translates to increased benefits playing a bigger role in keeping Americans in the labor force, the team said.
The benefit’s benefit
In all, the study estimates that the $US600 ($771) supplement to UI increased total spending from April to July by 2% to 2.6%. Additionally, the drop in job search from the supplement only decreased employment by 0.2% to 0.4%.
Even the researchers’ most conservative estimate signals that total employment actually increased as long as $US453,000 ($582,450) in additional spending translated to at least one additional job. The hypothetical “is very likely the case,” as previous research estimates the cost per job ranges from $US25,000 ($32,144) to $US125,000 ($160,720), they added.
The team cautioned that, while their work shows encouraging benefits from the increased UI payments, the trend might not generalize to other times, pandemic or otherwise. Lockdowns and other restrictions likely play a role in making the job search so costly. Further recovery in the labor market and economic reopening could also make UI payments a larger disincentive for staying in the job search, the team said.
Still, the study serves as a sharp rebuke to those criticizing such programs as “handouts” that do little to aid economic recoveries. Data suggests the benefit expansions “were a more effective policy than predicted,” the researchers said, opening the door for such fiscal support to become a regular tool in Congress’s toolkit.
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