This year, America is celebrated Labor Day by throwing millions of workers off unemployment benefits amid a raging pandemic.
The September 6 “benefits cliff” reflects, in part, a recent triumph for labor rights in the United States: During the COVID-19 recession, Congress did more to protect workers from the slings and arrows of outrageous labor markets than it had during any previous economic downturn. New relief programs increased the reach, generosity, and duration of unemployment benefits, while also insulating the jobless from the threat of eviction.
But these measures were all temporary. Congress had the will to assemble a “pop-up” version of a Nordic welfare state. It did not, however, see fit to permanently reform America’s dilapidated unemployment-insurance system. As a result, the exceptional generosity of the past year’s jobless benefits is about to yield an exceptionally sharp drop in the incomes of the unemployed.
Here’s a quick rundown of which Americans are about to see their finances disrupted, how this “benefits cliff” is likely to impact the broader economy, and why enhanced unemployment insurance (UI) probably will not be extended again, even as the Delta variant disrupts business plans and ICUs.
Who lost jobless benefits or $300 bonus checks?
In response to the COVID recession, the federal government made unemployment benefits more generous, longer lasting, and more widely accessible. It did this primarily through three major programs:
Federal Pandemic Unemployment Compensation (FPUC), which initially provided the jobless with a $600-a-week federal bonus on top of their state-level unemployment benefits. That bonus fell to $300 a week this year. The program was originally intended to keep workers solvent amid the widespread lockdowns of spring 2020. But it later came to function as a temporary solution to the problem of America’s unusually stingy state-level unemployment benefits, which average just $334 a week.
Pandemic Unemployment Assistance (PUA), which extended unemployment benefits to the self-employed, gig workers, independent contractors, and part-time laborers.
Pandemic Extended Unemployment Compensation (PEUC), which extended the total duration of the typical jobless American’s unemployment benefits from 26 weeks to 79 weeks.
When these programs ended on Labor Day, the long-term unemployed and PUA recipients lost all jobless benefits. According to an estimate from the Century Foundation, about 7.5 million U.S. workers fall into those two categories. Meanwhile, roughly 3 million other workers are retained unemployment benefits after Labor Day, but at a much lower rate as their FPUC bonuses expired. All this makes this week’s benefits cliff much steeper than any in modern memory. The Supreme Court’s recent rejection of the Biden administration’s eviction moratorium will exacerbate the human costs of enhanced UI’s disappearance.
No worker is an island. When a jobless American loses benefits, he or she is usually not the only one who suffers a loss in purchasing power. As Matt Bruenig notes, survey data suggests that today’s unemployed live in households with an average of 3.7 members. If the Century Foundation’s projections are correct, this means that the number of Americans who are about to see their household income sharply decline is 38.85 million.
Notably, this figure would be much higher if 26 states had not already elected to cut unemployment benefits in advance of the federal programs’ expiration. Since red states have led the charge to phase out unemployment benefits, the post–Labor Day income drop will fall disproportionately on workers in Democratic-leaning states. The impact of the “benefits cliff” will be especially pronounced for Black workers, who face persistent discrimination in the labor market and have a collective unemployment rate of 9.2 percent.
How will the “benefits cliff” impact the economy?
The official justification for allowing enhanced unemployment benefits to expire is simple: By providing jobless Americans with unusually generous welfare payments, Uncle Sam was lulling them into idleness and thus slowing the labor market’s recovery. “Help Wanted” signs decorated windows across the country. Small-business owners lamented their inability to find applicants for open positions. And these anecdotal signs of a “labor shortage” were complemented by some hard data points: As of June, there were 10 million job openings in America.
Red states barely needed an economic rationale for cutting welfare benefits. But the notion that Congress had accidentally engineered a labor shortage had some buy-in with Democratic economists too, which is one reason why the Biden administration is not pushing to extend the COVID-era UI programs past Labor Day (more on that in a bit). And yet available evidence suggests that enhanced unemployment benefits have had little impact on the labor market.
One silver lining of red states’ cuts to UI is that they’ve offered a natural experiment on the macroeconomic impact of jobless benefits. If high unemployment payments were holding back job growth, then one would expect to see a major divergence in the employment conditions of states that cut UI early this summer and those that did not. But this is not what we’ve seen.
As the People’s Policy Project shows in an analysis of payroll data, there is little correlation between a state’s UI policy and its job growth in recent months. States that cut UI in early June saw weaker job growth than states that kept enhanced benefits in place.
Overall, states that cut benefits this summer enjoyed a 1.14 percent increase in jobs between May and July, compared to 1.09 percent in the rest. The former’s 0.05 percent advantage is too small to be statistically significant.
A separate analysis from The Wall Street Journal yielded a similar finding: Between April and July, payrolls expanded by 1.33 percent in benefit-cutting states and 1.37 percent in benefits-maintaining ones.
This said, the available data suggests UI cuts had some impact on employment patterns. One recent study found that in states where benefits were slashed, 25.9 percent of workers who had been on the UI rolls in late April ended up finding a job by early August; in other states, only 21.5 percent of UI recipients found a job over that time span.
Which raises a question: If benefit cuts did correlate with a small — but statistically significant — increase in the conversion of UI recipients into employed workers, why was job growth roughly the same in states that cut benefits as it was in states that did not?
Arindrajit Dube, an economist at the University of Massachusetts, Amherst, offers an answer. Although unemployed workers in benefit-slashing states were more likely to secure jobs, such job-taking largely came at the expense of other jobless Americans. Data on employment outcomes for workers who had exited the labor force — which is to say, who were not on UI and not looking for a job — lends credence to Dube’s theory.
This summer, states that maintained federal UI benefits saw workers transition from being “not in the labor force” to “employed” at a much higher rate than other states did. As the following chart from Dube illustrates, this divergence between UI and non-UI states began in June 2021, right when the latter started cutting benefits.
One explanation for this finding: In states where the unemployed could afford to be choosey about which jobs they’d accept, employers were more willing to accommodate the needs and preferences of workers who had fallen out of the labor force (such as the partially disabled, mothers who need a flexible schedule due to the pandemic, or early retirees who are willing to return to the labor force but only at a certain wage).
Regardless, at present, there is little evidence that maintaining enhanced UI benefits has had a negative impact on job growth — which is an important fact, since the positive effects of enhanced UI are largely uncontested. We know that enhanced jobless benefits have kept millions of U.S. households out of poverty. And we know that such benefits have also stimulated consumer spending.
Judging by available evidence, red states ending enhanced UI benefits had two implications for workers’ incomes: On the one hand, it marginally increased their likelihood of getting a job and thus increasing their labor income. On the other hand, it directly reduced the value of their benefits and thus their welfare income. As Dube and his collaborators show, the latter effect dwarfed the former one: In states that cut benefits, the pool of workers who were on the UI rolls in late April saw their average labor income rise by $14 a week, while their average UI benefit fell by $278 a week. The average net-income change among this population was thus negative $264 a week (or $13,728 on an annualized basis).
As this group’s income fell, so did its consumer spending. On average, their expenditures declined by $145 a week. This represents a significant drop in demand for goods and services — and thus for workers. Which is to say: If cutting UI marginally increased the propensity of beneficiaries to find jobs, it also likely made jobs a bit harder to find.
Taken together, the available data suggests that the expiration of enhanced unemployment benefits will increase poverty, reduce consumer demand, and modestly accelerate UI beneficiaries’ return to paid employment — largely at the expense of other workers.
Could bonus benefits still be restored?
The last time Congress extended enhanced UI benefits, the U.S. was seeing about 61,000 new confirmed COVID cases a day. Now, that figure is 160,000.
Given the pandemic’s resurgence — and the economic data cited above — one might think that a further extension of enhanced UI benefits is at least as justified today as it was in March. If so, you are not Joe Manchin.
Back in the spring, the West Virginia senator was so opposed to extending enhanced UI he threatened to vote against the entirety of Joe Biden’s stimulus package unless the extension was shortened: Initially, Democrats had intended to have enhanced UI run until early October.
Moderate Democrats’ opposition to enhanced UI has only hardened since the spring. Research papers might say that generous unemployment benefits are not slowing down job growth. But business owners say otherwise. And unlike white papers, business owners donate money to moderate Democrats’ reelection campaigns.
Progressives have called for extending the enhanced benefits. But they’re already bogged down in a fight with moderates over the impending reconciliation bill. The centerpiece of Biden’s agenda, the reconciliation bill aims to spend $3.5 trillion on green infrastructure and new social programs. Moderates are vowing to oppose the legislation unless its top-line figure is cut. Adding another UI extension to that legislation would exacerbate this divide. Generous unemployment benefits have a high fiscal price; by one estimate, extending them from March to Labor Day cost roughly $300 billion. Progressives are already playing defense on the reconciliation bill (and/or contemplating which of Biden’s climate and social-welfare proposals they can live without). Odds that they will succeed in adding a new, expensive program to the bill are long.
For his part, Biden opposes any further extension of federal UI benefits, a position that Treasury Secretary Janet Yellen and Labor Secretary Martin Walsh conveyed in a recent letter to Congress. In the same missive, however, the Biden administration encouraged states with high unemployment rates to extend enhanced UI benefits using their own funds. Biden’s stimulus bill provided states with $350 billion in fiscal aid. The White House argues that states could use those federal funds to prolong enhanced UI without any further act of Congress.
But as Insider reports, no states are taking Biden up on this offer. Most have already allocated the bulk of their federal relief funds. And as already noted, unemployment benefits are fiscally expensive.
The substantive case for extending pandemic enhanced unemployment insurance is strong. But the political coalition behind that policy is weak. So this Labor Day, America’s most vulnerable workers saw their incomes plummet.
This post has been updated throughout.
