Many workers in states that are cutting benefits 'will be desperate to keep body and soul together,' said Stephen Wandner, a senior fellow at the National Academy of Social Insurance
Pressure is building in some states to pull the plug on enhanced federal unemployment benefits.
Since the onset of the pandemic, every state has accepted federal unemployment aid that enabled them to distribute benefits to out-of-work people who normally would not qualify for them. States have also been handing out extra federal benefits -- including an additional $600 a week at one point -- to all unemployed workers on top of their state benefits.
These enhanced unemployment benefits were set to expire in September, but a growing number of states want to end them sooner in part because of mounting complaints from employers who cannot fill job vacancies because, they say, overly generous federal unemployment benefits are keeping would-be workers at home.
Last month, the U.S. added some 266,000 jobs -- far below the 1 million jobs economists were forecasting. Meanwhile, there are more than 8 million unfilled positions in the U.S ., according to the Department of Labor's Job Openings and Labor Turnover Survey.
But initial jobless claims dropped to a pandemic low of 473,000 last week, the DOL reported on Thursday.
President Joe Biden acknowledged that "some employers are having trouble filling jobs," when he spoke about the jobs report last week. But when asked if enhanced unemployment benefits kept some workers from returning to work he said, "No, nothing measurable."
Pulling the plug on federal unemployment benefit programs, which were originally enacted under the CARES Act in April 2020, when some 23 million Americans were out of work, will encourage more Americans to seek out employment opportunities, some economists and policymakers hold.
***And employers in the 16 states that are opting out of federal unemployment benefits programs -- Alabama, Arizona, Arkansas, Georgia, Idaho, Iowa, Mississippi, Missouri, Montana, North Dakota, Ohio, South Carolina, South Dakota, Tennessee, Utah and Wyoming -- won't have to raise wages to compete with unemployment benefits that in some cases exceed their state's minimum wage.***
But some research suggests that doing away with federal unemployment benefits may also have one big unintended consequence -- people could become more frugal with their money.
When federal benefits were cut to $300 from $600, total spending in 15 Illinois counties declined by 5%
After federal unemployment benefits were halved from $600 to $300, the total consumer spending levels across 15 counties in Illinois dropped by 5%, according to a paper titled "The Effect of Fiscal Stimulus: Evidence from COVID-19" that was circulated by the National Bureau of Economic Research in August.
The authors of the paper -- who are professors at the University of Pennsylvania, University of Chicago, Illinois State University, New York University and Ohio State University -- published a revised version of the paper two months ago.
Researchers compared workers' wages before the pandemic to what they were receiving in unemployment benefits during the pandemic using data provided by the Illinois unemployment insurance system. They used aggregated data from several private companies to estimate debit and credit-card spending.
If individual spending levels declined by 5% as a result of lowering the benefits to $300 a week, it would hardly be headline-worthy, said Julia Lane, a professor at NYU's Wagner Graduate School of Public Service, and an author of the study.
But a 5% drop in total spending at the county level is "quite high," she said.
Consumer spending is the lifeblood of the economy, representing about 70% of all U.S. gross domestic product . If consumer spending dropped by 5% nationwide it would mean a "massive" downturn in GDP, Lane told MarketWatch.
Total consumer spending would likely decline by a smaller percentage across every county in the U.S. once the $300 supplemental unemployment benefit expires for every jobless American in September, Lane said. That's because far more people were unemployed when the study was conducted than right now.
But "in addition to losing the vital purchasing power workers have in their local and state economies, they are also being forced further into poverty by losing the ability to support their families, secure housing, food and more," said Alexa Tapia, an expert in unemployment benefits at the National Employment Law Project, an advocacy organization focused on workers' rights.
Of all the government spending programs, unemployment benefits have one of the biggest 'bangs for their buck'
For every dollar spent on unemployment insurance, there's a multiplier effect leading to a 1.64 increase in GDP , according to a 2008 study published by Mark Zandi, chief economist at Moody's Analytics.
Meanwhile, for every dollar spent on infrastructure projects such as President Joe Biden's $2.3 trillion American Jobs Plan, U.S. GDP could be expected to increase by a multiple of 1.59.
***Without the extra $300 a week benefit, jobless Americans in Alabama, Arizona, Arkansas, Georgia, Mississippi, Missouri, South Carolina and Tennessee, where average state weekly benefits are below $300, will see their total benefits shrink by more than half.***
Gig workers, independent contractors and self-employed workers across all of the 16 states could stop receiving unemployment benefits altogether.
These workers "will be desperate to keep body and soul together," said Stephen Wandner, a senior fellow at the National Academy of Social Insurance. "There will be a behavioral change," he added, predicting that more people will apply to jobs once they're cut off from unemployment benefits.
"We don't know how big a change there will be," Wandner, a former actuary at the U.S. Labor Department, said, adding that "the states that are doing this will be disappointed" because it won't incentivize as many people as they'd probably like to go back to work.
More than 4 million Americans aren't working because they're afraid of contracting coronavirus, according to data from the latest U.S. Census Bureau's Household Pulse Survey that was published on April 7. Another 8 million people indicated that they couldn't work because they were caring for a child or elderly person.
But some business leaders say enhanced unemployment benefits are keeping people from applying for jobs.
For example, in Mississippi, the state with the lowest cost of living , where the maximum weekly unemployment benefit is $235, the extra $300 a week in federal benefits "is significant," said Douglas Holmes, president of UWC Strategic Services on Unemployment & Workers' Compensation, a trade group representing the business community on unemployment insurance matters.
In fact, it's such a significant amount for Mississippians that it will likely impact "their willingness to go back to work on top of concerns about COVID" after June 12, when Mississippians will no longer receive federal benefits under an order the state's Republican Gov. Tate Reeves signed earlier this week , Holmes told MarketWatch.
"There are certain circumstances in which the additional $300 a week could be the thing that a rational person looks at and says, 'I'm not going to take that job because I can make enough on unemployment to wait for the next better job,'" Holmes said.
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