Personal Finance

Ending unemployment benefits had little impact on jobs and fueled $2 billion spending cut, study finds

Key Points
  • States that withdrew from federal unemployment programs in June saw slightly higher job growth through early August relative to states that didn't end benefits, according to a new study.
  • Still, 7 in 8 people who saw benefits reduced or eliminated did not find employment, according to researchers.
Los Angeles County Regional Food Bank workers help with food distribution in Willowbrook, California on April 29, 2021.
Frederic J. Brown | AFP | Getty Images

States that withdrew early from federal unemployment programs pushed few people back to work and fueled a nearly $2 billion cut in household spending, potentially hurting their local economies, according to new research.

Twenty-six state governors — all Republican, except one — opted out of the pandemic-era programs several weeks before their official expiration on Labor Day. Enhanced benefits were keeping the unemployed from looking for jobs and fueling a labor shortage, they claimed.

That bet seems to have had a limited payoff so far, according to a paper authored by economists and researchers at Columbia University, Harvard University, the University of Massachusetts Amherst and the University of Toronto. The research was published Friday.

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The data suggests unemployment benefits aren't playing a big role in hiring challenges and that other factors are having a larger impact — a similar thrust to other recent research analyzing the policy decisions.

The new paper uses anonymized bank-account data from financial services company Earnin to track 18,648 individuals who were receiving unemployment benefits in late April. Researchers compared individuals in 19 states that withdrew federal benefits in June against those in the 23 states that kept them intact.

States that ended federal benefits early saw larger job gains among the unemployed: Their employment jumped 4.4 percentage points relative to jobless individuals in states that kept benefits flowing, according to the paper, which analyzes data through the first week of August.

However, that translates to just 1 in 8 unemployed individuals in the "cutoff states" who found a job in that time period. The majority, 7 out of 8, didn't find a new job.

"Yes, there was an uptick [in employment]," University of Massachusetts Amherst economics professor Arindrajit Dube said. "Most people lost benefits and weren't able to find jobs."

Dube co-authored the research paper.

The employment dynamic — a loss of benefits without resulting job income for most people — led households to cut their weekly spending by 20%, according to the paper. As a result, economies of the cutoff states saw a reduction of nearly $2 billion in consumer spending from June through the first week of August.

"They turned down federal transfers and that money didn't come back into the state [from new job income]," University of Toronto assistant professor Michael Stepner said. He also co-authored the paper.

A 20% spending cut amounts to a big reduction in quality of life for these households, which are largely lower-income, Stepner said.

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The governor's offices in Alabama, Nebraska, New Hampshire and Utah — a subset of the states — didn't return CNBC's request for comment on the policies.

"We have announced the end date of our state of emergency, there are no industry shutdowns, and daycares are operating with no restrictions," Alabama Gov. Kay Ivey said in May when announcing the withdrawal. "Vaccinations are available for all adults. Alabama is giving the federal government our 30-day notice that it's time to get back to work."

The research findings come as U.S. job openings broke a record in June, while the economy remains nearly 6 million jobs below its pre-pandemic level. Retail sales nationwide fell more than expected last month amid renewed Covid-19 fears.

The Biden administration is encouraging states with high unemployment rates to use federal funds provided by the American Rescue Plan to keep benefits flowing past Sept. 6.

Most job growth in the withdrawing states wasn't due to the loss of a $300 weekly supplement, as may have been expected, Dube said. Instead, it was largely due to workers like the self-employed and long-term unemployed who lost their aid entirely since they're ineligible for traditional state benefits.

Relative differences in the states' economies also don't seem to account for the research results, Dube and Stepner said. And a spike in job growth is unlikely in coming weeks, since the pace of hiring in the cutoff states had plateaued by mid-July, they said.

The research results suggest enhanced unemployment benefits are a small-but-incomplete explanation for hiring challenges, they said.

"There is a gap in the labor market," Stepner said. "There are lots of open jobs, below-average labor force participation, and yet these open jobs are not being filled.

"I think it's an open question [as to why]," he added. "I don't think any labor economist has a clear explanation."

Economists point to ongoing Covid health concerns and continued challenges posed by caregiving responsibilities as other possible factors.

Workers may also expect more pay, benefits and flexibility from a prospective employer. Stimulus checks and other pandemic aid may have provided a financial cushion so workers feel they can be more selective when looking for a new job.