Personal Finance

Cuts to unemployment benefits didn’t spur jobs, report says

Key Points
  • About half of states cut federal unemployment benefits in June or July 2021, a few months ahead of their scheduled expiration.
  • State officials thought pulling funds would help ease the challenges employers were facing in hiring workers.
  • But a paper by the Federal Reserve Bank of San Francisco found that policy didn't seem to have its intended effect on employment.
A "We're Hiring" sign hangs on the front door of a toy store in Greenvale, New York, on Sept. 30, 2021.
John Paraskevas/Newsday RM via Getty Images

State cuts to pandemic unemployment benefits last summer had a small impact on hiring, suggesting enhanced funding for the unemployed didn't play a big role in labor shortages, according to a recent report.

The federal government greatly expanded the social safety net for the jobless in March 2020. It offered hundreds of dollars in additional weekly benefits to individuals and gave aid to millions of previously ineligible people, like gig workers and the self-employed.    

Governors of roughly half the states, most of them Republican, withdrew federal benefits in June or July 2021 — a few months before their scheduled expiration nationwide on Sept. 6.

The debate at the time centered on what was seen as the likelihood that the benefit boost was contributing to employers' hiring challenges.

Some officials believed federal assistance kept people from looking for work, while others argued that factors like ongoing pandemic health risks and family-care duties (kids home from school, for example) played a bigger role in the job crunch.

But an analysis by researchers at the Federal Reserve Bank of San Francisco found states that withdrew benefits early didn't experience the intended effect of spurring a big increase in jobs. It compared hiring rates from July to September 2021 in the states that ended benefits with those that kept them intact.

Hiring picked up a minuscule 0.2 percentage point in the "cutoff" states compared to the benefit-keeping states — a "quite small" increase considering states' average monthly hiring rates of about 4%-5%, according to the analysis.

Put differently, if a state that maintained federal benefits had a 4.5% hiring rate, a state that cut them would have had a 4.7% rate.  

"That would be pretty much imperceptible," said Robert Valletta, senior vice president and associate director of research at the Federal Reserve Bank of San Francisco, who co-authored the analysis.

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The hiring rate measures the number of hires during a month relative to overall employment; it serves as a "natural starting point" to assess the policy impact, the analysis said.

Earlier research into the effects of pandemic unemployment benefits have largely had similar findings.

One study in August 2021 also found little impact on jobs and suggested an early withdrawal of benefits might harm state economies. Other studies have examined a $600 weekly enhancement offered from March to July 2020 and found the extra benefit didn't prove to be a big disincentive on returning to work.

Some research does conflict with this assessment, however. For example, a paper from December found a large uptick in employment among "prime age" unemployed workers (ages 25 to 54) in states that opted out of federal benefit programs in June.

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Varying results boil down to different economic data sets that researchers have used to examine the dynamic, according to Valletta.

One caveat to the San Francisco Fed's report is that it doesn't account for different labor market conditions in the "cutoff" states versus those that maintained federal benefits.

For example, a small hiring impact in cutoff states might have been partly attributable to labor markets that had already rebounded to a greater degree than comparable non-cutoff states. In that case, there might have been less of a chance of a hiring boom.

It's important to keep in mind that some meaningful fraction of people suffered real hardship.
Robert Valletta
senior vice president and associate director of research at the Federal Reserve Bank of San Francisco

Valletta and his colleagues have studied this point in preliminary follow-up work, he said. So far, they've also found subdued hiring rates in the states that lost federal benefits in early September — suggesting the elimination of benefits didn't cause a big pickup in hiring regardless of the relative labor market conditions, he said.

However, Valletta and the co-authors go on to note that their findings seem to indicate that while hiring didn't surge, the early benefit cutoff didn't harm the states' labor markets.

"But it's important to keep in mind that some meaningful fraction of people suffered real hardship as a result," Valletta said.