Cutting UI benefits by $400 per week will significantly harm U.S. families, jobs, and growth: 3.4 million fewer jobs will be created over the next year as a result

Last month, we estimated the effect of allowing the $600 supplement to weekly unemployment insurance (UI) benefits to lapse at the end of July, as is currently scheduled. We found that this would strip away enough aggregate demand from the economy to slow growth in gross domestic product (GDP) by 3.7% over the next year. This slower growth would result in 5.1 million fewer jobs created over the next year.

Currently Senate Republicans are offering a proposal to reduce this weekly $600 supplement to closer to $200. This is better than allowing the $600 benefit to go all the way to zero, but this would still lead to GDP that was lower by 2.5% a year from now, and, would lead to 3.4 million fewer jobs created over the next year.

These are huge numbers—but they are driven by the fact that the support this extra $600 has given tens of millions of working families is huge. The economic shock of COVID-19 was enormous, but the large expansions to the UI system included in the CARES Act of March were incredibly effective in blunting the effect of this shock. The only problem with these expansions was that they begin running out next week—while the job market remains fundamentally damaged.

Next week (July 30) will see data on growth in GDP for the second quarter of 2020 released. This data is all but guaranteed to show the largest one-quarter collapse in economic growth in U.S. history. The week after that (on August 7), we will see data on job-growth for the month of July. Early indications strongly signal that we lost jobs in July, reversing the last two months gains—which were already wholly insufficient to declare the labor market healthy enough to begin ramping down the generosity of UI benefits. The big constraint on economic growth right now is the spread of the coronavirus. If we allow the $600 supplement to lapse, another huge constraint on growth will be imposed—collapsing incomes for the tens of millions of U.S. families that had to rely on these benefits in recent months.

Figure A

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).

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Table 1

Going from $600 to $200 will significantly damage job growth over the next year: Average reduction in personal income, GDP, and employment over the next year if $600 weekly UI supplement is reduced to $200, August 2020 to July 2021

Personal income (millions) GDP Jobs supported
U.S., total $339,080 2.5% 3,388,798
Alabama $3,266 2.1% 28,841
Alaska $830 2.2% 8,305
Arizona $3,746 1.5% 37,044
Arkansas $2,040 2.3% 19,989
California $48,639 2.3% 557,428
Colorado $4,398 1.7% 44,599
Connecticut $4,687 2.5% 49,793
Delaware $891 1.8% 9,747
District of Columbia $1,214 1.2% 13,074
Florida $18,437 2.5% 163,280
Georgia $12,822 3.1% 124,403
Hawaii $2,260 3.5% 21,834
Idaho $929 1.7% 6,699
Illinois $12,746 2.1% 130,099
Indiana $4,219 1.7% 39,629
Iowa $2,948 2.3% 28,387
Kansas $1,742 1.5% 17,393
Kentucky $3,857 2.7% 33,168
Louisiana $5,437 3.1% 54,630
Maine $2,030 4.5% 12,017
Maryland $4,316 1.5% 44,991
Massachusetts $10,162 2.6% 104,775
Michigan $15,813 4.4% 129,680
Minnesota $7,073 2.8% 71,756
Mississippi $3,007 3.8% 28,496
Missouri $4,292 1.9% 39,607
Montana $856 2.5% 7,867
Nebraska $1,067 1.3% 10,282
Nevada $5,953 5.0% 56,111
New Hampshire $1,839 3.1% 17,961
New Jersey $9,892 2.3% 98,607
New Mexico $1,821 2.6% 19,341
New York $30,758 2.7% 309,312
North Carolina $9,721 2.5% 94,997
North Dakota $535 1.4% 6,195
Ohio $10,523 2.3% 86,399
Oklahoma $2,601 1.9% 30,679
Oregon $4,809 2.9% 77,066
Pennsylvania $16,302 3.0% 168,428
Rhode Island $1,434 3.4% 13,485
South Carolina $3,990 2.4% 36,322
South Dakota $379 1.1% 3,405
Tennessee $5,571 2.2% 53,513
Texas $22,370 1.8% 243,051
Utah $1,404 1.1% 13,819
Vermont $849 3.7% 7,888
Virginia $6,900 1.9% 71,033
Washington $11,019 2.8% 81,483
West Virginia $1,550 3.0% 15,071
Wisconsin $4,851 2.1% 43,757
Wyoming $286 1.1% 3,064

Note: 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), and data on continuing unemployment insurance claims from the Department of Labor (DOL).

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