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Forthcoming 2022

Increasing Employment by Halting Pandemic Unemployment Benefits

by Iris Arbogast and Bill Dupor

Abstract

In mid-2021, 26 states halted participation in all or some federal emergency unemployment benefits (EUB) programs before those programs' federal funding lapsed. This article uses this asynchronous EUB cessation between early- and late-halting states to estimate the causal impact of benefit cessation on employment. We find that cessation increased employment by 29 persons for every 100 (pre-halt) EUB recipients. Expressed as a number of jobs, if all states had halted EUB in June, September employment would have been 3.4 million persons higher relative to a no-halt counterfactual. Late-halting states could have significantly accelerated their states' jobs recoveries in the second half of 2021 through early program cessation.


Iris Arbogast is a research associate and Bill Dupor is vice president and economist at the Federal Reserve Bank of St. Louis.



As part of the 2020 CARES Act, the federal government augmented regular state unemployment insurance (UI) programs with several temporary measures: a $600 weekly add-on for UI recipients, extended eligibility to persons who otherwise would not have been covered by their state programs (e.g., gig and contractor workers), and the extension of benefits beyond the duration of those provided by regular state programs. These emergency unemployment benefits (EUB) were renewed in later legislation, with the only major change being a reduction in the add-on from $600 to $300 per week.

In late winter and spring 2021, job vacancies in the United States soared to near historic highs while employment growth slowed. This pattern for vacancies and employment was observed across regions and sectors. The Federal Reserve Beige Books from those months provide accounts of business owners lamenting difficulty in filling job vacancies. Moreover, business owners nationwide linked this difficulty with the historic generosity of unemployment benefits.

Over a period of several weeks, 26 governors announced that their states would halt participation in these EUB programs either partially or fully. Twenty states halted program participation between June 19 and July 3. Four states did so on June 12 as did two states later in July. After September 9, the remaining states ended participation because the programs' federal funding lapsed.

While both Republican- and Democrat-led states saw high job openings and slowed employment growth, with one exception, only Republican governors implemented the policy change before funding lapsed. This politically driven policy variation provides a source of identification to assess the jobs effect of terminating EUB. Our outcome variable is the four-month change in employment, scaled by the lagged number of EUB recipients. We run a panel least-squares regression of the outcome on a dummy indicator for the halt month and include several alternative sets of control variables. The model is identified by our assumption that, conditional on our control variables, the regression error term is orthogonal to the halt-month indicator.

We find that, as a result of cessation, employment increased by 29 persons for each 100 individuals receiving these benefits pre-cessation. We show this effect is statistically significant and robust to controlling for a battery of additional covariates. Expressed as an aggregate jobs effect, our estimate implies that had all states terminated benefits in June 2021, employment would have been 3.4 million persons higher in September 2021 relative to a no-halt counterfactual.


Read the full article.