UI claims and GDP growth are historically bad: Now is not the time to cut benefits that are supporting jobs

by nyljaouadi1
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Last week 2 million workers applied for unemployment insurance (UI) benefits. Breaking that down: 1.2 million applied for regular state unemployment insurance (not seasonally adjusted), and 830,000 applied for Pandemic Unemployment Assistance (PUA). Many headlines this morning are saying there were 1.4 million UI claims last week, but that’s not the right number to use. For one, it ignores PUA, the federal program that is serving millions of workers who are not eligible for regular UI, like the self-employed. It also uses seasonally adjusted data, which is distorted right now because of the way Department of Labor (DOL) does seasonal adjustments.

Last week was the 19th week in a row that unemployment claims have been more than twice the worst week of the Great Recession. If you restrict this comparison just to regular state claims—because we didn’t have PUA in the Great Recession—this is the 19th week in a row that claims are more than 1.25 times the worst week of the Great Recession.

Republicans in the Senate just allowed the across-the-board $600 increase in weekly UI benefits to expire. They are proposing to (essentially) replace it with a $200 weekly payment. That $400 cut in benefits is not just cruel, it’s terrible economics. These benefits are supporting a huge amount of spending by people who would otherwise have to cut back dramatically. The spending made possible by the $400 that the Senate wants to cut is supporting 3.4 million jobs. If you cut the $400, you cut those jobs. This map shows the number of jobs that will be lost in each state if the extra $600 unemployment benefit is cut to $200.

If the weekly unemployment insurance increase is cut by $400, how many jobs will it cost over the next year?: Jobs cost as a level and as a share of employment

State Jobs cost Jobs cost, as a share of employment
Alabama 28,841 1.4%
Alaska 8,305 2.5%
Arizona 37,044 1.2%
Arkansas 19,989 1.6%
California 557,428 3.2%
Colorado 44,599 1.6%
Connecticut 49,793 2.9%
Delaware 9,747 2.1%
Washington D.C. 13,074 1.6%
Florida 163,280 1.8%
Georgia 124,403 2.7%
Hawaii 21,834 3.3%
Idaho 6,699 0.9%
Illinois 130,099 2.1%
Indiana 39,629 1.2%
Iowa 28,387 1.8%
Kansas 17,393 1.2%
Kentucky 33,168 1.7%
Louisiana 54,630 2.7%
Maine 12,017 1.9%
Maryland 44,991 1.6%
Massachusetts 104,775 2.8%
Michigan 129,680 2.9%
Minnesota 71,756 2.4%
Mississippi 28,496 2.4%
Missouri 39,607 1.4%
Montana 7,867 1.6%
Nebraska 10,282 1.0%
Nevada 56,111 3.9%
New Hampshire 17,961 2.6%
New Jersey 98,607 2.3%
New Mexico 19,341 2.2%
New York 309,312 3.1%
North Carolina 94,997 2.1%
North Dakota 6,195 1.4%
Ohio 86,399 1.5%
Oklahoma 30,679 1.8%
Oregon 77,066 3.9%
Pennsylvania 168,428 2.8%
Rhode Island 13,485 2.7%
South Carolina 36,322 1.6%
South Dakota 3,405 0.8%
Tennessee 53,513 1.7%
Texas 243,051 1.9%
Utah 13,819 0.9%
Vermont 7,888 2.5%
Virginia 71,033 1.7%
Washington 81,483 2.3%
West Virginia 15,071 2.1%
Wisconsin 43,757 1.5%
Wyoming 3,064 1.1%

Notes: We take the relationship between the unemployment rate and the boost to personal income from the extra $600 payment that held in May of 2020 and assume it falls to $200 beginning August. We apply a multiplier of 1.5 to the personal income decline provided by cutting back on the enhanced UI benefit. We then divide this boost by overall GDP, and apply the resulting percentage change to the average level of employment in the first quarter of 2020 to get an implied employment reduction. The numbers in the chart are the average reductions to personal income, GDP, and employment between the third quarter of 2020 and the second quarter of 2021. Some quarters would see even larger effects.

Source: Author’s analysis based on data from the National Income and Product Accounts (NIPA) data from the Bureau of Economic Analysis (BEA), projections from the Congressional Budget Office (CBO), data on continuing unemployment insurance claims from the Department of Labor (DOL), and total nonfarm employment from the Bureau of Labor Statistics (BLS) Current Employment Statistics (CES).

Today’s release of GDP data underscores how wrong it is to cut those benefits. Second-quarter GDP collapsed at the fastest rate on record—and the second quarter includes the employment bounce-back of May and June. And because we did not put the public health measure in place necessary to successfully reopen, the coronavirus has spiked, and the economic improvement we saw in May and June has stalled, if not reversed. Now is not the time to cut benefits that are supporting jobs.

But what about the potential work disincentive of the extra $600? After all, the additional payment means many people have higher income on unemployment insurance than they did from their prior job. It turns out that the concern about the disincentive effect has been massively overblown. In fact, rigorous empirical studies show that any theoretical disincentive effect has been so minor that it cannot even be detected. For example, a new study by Yale economists found no evidence that recipients of more generous benefits were less likely to return to work. A case in point: in May and June—with the $600 in place—7.5 million people went back to work. And, about 70% of likely UI recipients who returned to work were making more on UI than their prior wage. Further, there are 14 million more unemployed workers than job openings, meaning millions will remain jobless no matter what they do. Slashing the $600 cannot incentivize people to get jobs that are not there. Even further, many people are simply unable to take a job right now because it’s not safe for them or their family, or because they have care responsibilities as a result of the virus. Slashing the $600 cannot incentivize them to get jobs, it will just cause hardship.

Slashing the $600 will also exacerbate racial inequality. Due to the impact of historic and current systemic racism, Black and brown communities are suffering more from this pandemic, and have less wealth to fall back on. They will take a much bigger hit if the $600 is cut. This is particularly true for Black and brown women and their families, because in this recession, these women have seen the largest job losses of all.

Figure B combines the most recent data on both continuing claims and initial claims to get a measure of the total number of people “on” unemployment benefits as of July 25. DOL numbers indicate that right now, 33.8 million workers are either on unemployment benefits, have been approved and are waiting for benefits, or have applied recently and are waiting to get approved. But importantly, Figure B provides an upper bound on the number of people “on” UI, for two reasons: (1) Some individuals may be being counted twice. Regular state UI and PUA claims should be non-overlapping—that is how DOL has directed state agencies to report them— but some individuals may be erroneously counted as being in both programs; (2) Some states are likely including some back weeks in their continuing PUA claims, which would also lead to double counting (the discussion around Figure 3 in this paper covers this issue well).

DOL reports that 33.8 million workers are either on unemployment benefits or have applied and are waiting to see if they will get benefits: July 30, 2020

Regular state UI: Continued claims Regular state UI: Initial claims PUA: Continued claims PUA: Initial claims Other programs (mostly PEUC and STC) Total
Cumulative 16,881463 1,205,871 12,413,322 1,765,770 1,568,239 0
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The data below can be saved or copied directly into Excel.