Federal Unemployment Insurance Benefit Slowed Employment Growth

Shortly after the advent of the COVID-19 pandemic, Congress passed the CARES Act, a $2.2 trillion bill designed to alleviate the negative economic consequences of government-mandated shutdowns. Included in the bill was a $600 weekly federal unemployment bonus payment on top of the state benefits that unemployed workers already could receive.

Since the combined federal/state unemployment insurance benefit was greater than the weekly wages of many employees, some economists worried that it might depress employment growth. The Badger Institute decided to examine whether the federal bonus payments served as a disincentive to workers returning to jobs once the economy rebounded.

During the throes of the crisis, when many restaurants, retail establishments and other businesses were closed, the boost helped people weather job losses. But to prevent the supplemental benefits from discouraging a return to the workforce, lawmakers set them to expire after six months.

That changed in August 2020 when the Trump administration, via executive order, extended the benefit at half of the original $600 rate. The American Rescue Plan, which passed in March 2021, extended this $300 weekly benefit until Sept. 6, 2021 — although states had the discretion to end it earlier, and many did.

We first examined what happened to labor markets when the federal benefit decreased from $600 to $300 a week. We find no evidence that this affected the labor markets to a significant degree.

In June, a number of governors took steps to end the federal portion of unemployment insurance in their states. Ultimately, 22 states ceased to provide the supplemental benefits. The remaining 28 states and the District of Columbia kept the federal supplement in place after July 1.

The variation between states that extended benefits to September and those that did not gave us a second opportunity to measure the supplement’s impact on labor markets.

We compared the two sets of states to see if their labor markets differed during the three months when the unemployment insurance benefits differed.

Our early analysis showed that there is a modicum of evidence that the higher benefits did affect employment levels, at least once labor market demand picked up. We compared the unemployment rate and its changes across the two groups of states and observed that in the three months before the July 1 cutoff, the states that were to continue to provide supplemental benefits saw their unemployment rate fall by 0.26%, while the states that would soon end the benefits saw theirs fall by an average of 0.07%.

In Wisconsin, which maintained the federal bonus until it expired on Sept. 6, the unemployment rate has remained virtually unchanged for the past six months at 3.9% even as the national unemployment rate fell an entire percentage point, from 6% to 5%.

Overall, in the 22 states that did eliminate the supplemental benefits earlier, the unemployment rate fell by 0.33% over the next three months, compared to a 0.22% drop for the states that continued providing the supplement.

The differences are modest but statistically significant.