Sat. May 21st, 2022

According to an analysis by the Financial Times and studies by economists and industry analysts, the end of the extra federal unemployment benefits for millions of Americans this month will provide a significant boost to the U.S. labor market.

Prior to the September expiration — which left more than 7.5 million people without access to increased pandemic-related benefits — unemployed people received an additional $ 300 a week from the federal government in addition to state aid.

The federal benefits were politically divisive, with many Republican leaders claiming they had deterred people from returning to the labor force and caused a nationwide labor shortage that hampered economic recovery.

In June, 22 states withdrew the supplementary payments – a number that rose to 26 in mid-summer – causing a kind of natural experiment as the other states kept it in place.

A FT analysis of monthly data from the U.S. Department of Labor shows that states that terminated early benefits do not show faster growth than those that decided to keep additional aid going. Non-farm payroll systems rose by about 1.3 percent in May systems, when most states set out their plans to abandon the federal program, until August.

Line chart showing the trajectory of wage growth (indexed to May 2021) through August 2021 for the 26 U.S. states that terminated federal unemployment benefits early against other states.  There is no significant difference between the two, suggesting that the reduction in benefits did not lead to higher job growth

“The view that unemployment benefits hamper supply and labor growth is completely wrong,” said Gregory Daco, a U.S. economist at Oxford Economics. ‘It was definitely a factor, but it’s not the only one.

For most of 2020, the federal supplement was $ 600 per week, while workers and other self-employed or part-time individuals also received assistance along with those with health-related work restrictions.

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

The decay of the nationwide benefits took place at an important moment for the recovery of the labor market. A series of strong job reports were short cut in August, when only 235,000 positions were created.

This was a significant delay compared to the approximately 1 million jobs added in June and July, turning the spotlight on the attention people are withholding from returning to work.

Some studies have shown that reducing the increased benefits early on increased the rate at which unemployed people returned marginally. But economists warn that the consequences are modest and likely temporary at best, suggesting that the acute shortage of jobs holding back job recovery is difficult to overcome.

Indeed, Jed Kolko, chief economist of the jobs website, analyzed the federal job data and found that unemployment fell slightly faster from May to August in states that cut off federal benefits than elsewhere.

But the gap was narrowed by simultaneous job gains in states that kept aid in place. There came the increases of people who were outside the labor force – people who are not working and not actively looking for work – rather than unemployed.

Teenagers, for example, have played an important role in filling vacancies in these states. Arindrajit Dube, professor of economics at the University of Massachusetts, found that this group gets nearly twice as many jobs in July as those in states that retain benefits.

Bar graph showing the composition of where the growth in jobs came from in the 26 states that ended the federal unemployment benefits over other states.  The two sets of states experienced almost identical employment gains, but in states that ended benefits early, the data indicated that most jobs were filled by those who were previously unemployed, while in other countries most of the jobs were filled by those who previously was outside the workforce

One fear is that some states will suffer from acongestion effect“, According to Dube, in which previously unemployed people fill positions that may have been filled by people entering the workforce.

“You’re partly replacing who gets the job, instead of just creating more jobs,” he said, leading to a ‘wash’ in terms of the impact on the job.

In a recent newspaper investigation anonymous bank records of more than 18,000 low-income workers receiving unemployment benefits in April, a team led by Kyle Coombs of Columbia University and Dube also found only a small difference in the appointment of states that end federal benefits early has.

By August, 22 percent of the people studied had taken jobs in states that maintained federal insurance, compared with 26 percent who cut it.

Other factors rather complicate the return to work. States that scrapped the federal program early suffered disproportionately from the worrying spread of the Delta coronavirus variant. In August, these states reported job losses in the recreation and hospitality sector, while hiring for those positions increased elsewhere.

Line chart showing the career of wage growth in the Recreation and Hospitality sector (until May 2021) to August 2021 for the 26 U.S. states that ended the federal unemployment benefits early against other states.  In August, unemployment in the states actually fell, while elsewhere it rose slightly

“It’s probably the real circumstances and pandemic – related changes in everyday life that are preventing many people from returning,” said James Sweeney, US economist at Credit Suisse. “We are going to need lower infections and people who have a lesser pandemic risk that the labor supply could change significantly.”

Loretta Mester, president of the Federal Reserve Bank of Cleveland, reported earlier this month that child care problems are likely to deter people. School reopening should help ease these constraints, she said, paving the way for further gains in the labor market.

Due to the limited labor market impact of the expired unemployment benefits, Williams predicts at Evercore that a maximum of 200,000 to 250,000 additional jobs per month will be created in the short term now that this additional assistance has expired.

Economists are now grappling with the possible consequences of reducing support when 5.3 million more Americans are out of work than before the pandemic.

“The expiration of these benefits could do more damage to families’ finances than is good for their work situation,” Daco warned.

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