Labor Day came with a shock to the labor market this year, as emergency unemployment insurance (UI) programs first enacted as part of the CARES Act in spring 2020 expired this week. Instead of pursuing a federal extension of the programs, the Biden administration gave states the option to continue providing extra support for their unemployed populations by allowing them to tap into the $350 billion in state aid allocated by the American Rescue Plan. Now, states must strike a balance between supporting those still affected by the public health crisis and getting Americans back into the workforce.
In response to the COVID-19 pandemic, Congress enacted five separate UI expansions, the most substantial of which included:
- Federal Pandemic Unemployment Compensation (FPUC), which provided a $300 supplement (originally $600) to regular unemployment benefits
- Pandemic Emergency Unemployment Compensation (PEUC), which added 53 weeks (originally 13) to UI eligibility
- Pandemic Unemployment Assistance (PUA), which extended unemployment benefits to many Americans not eligible for regular UI, such as gig economy workers
After extensions in December 2020 and March 2021, these programs expired on September 6, though nearly half of states had already discontinued some or all of their UI expansions earlier this summer.
By some estimates, the expiration likely led to around 7.5 million Americans completely losing UI benefits and an additional 3 million losing the $300 supplement, and will lead to a drop in spending of around $8 billion in September and October. In an effort to provide flexibility to states, Treasury Secretary Janet Yellen and Department of Labor Secretary Marty Walsh recently announced that states could use unspent money from the $350 billion in state and local government aid allocated by the American Rescue Plan to continue providing expanded UI benefits.
Now, states must decide whether to extend these expansions, weighing the ever-changing economic and public health conditions. Currently, however, no state has announced plans to continue emergency UI programs.
Experts and policymakers continue to fiercely debate whether the supplemental $300 provided by FPUC discouraged Americans from returning to work. While regular UI benefits are relatively modest and designed to only provide a temporary bridge between the previous job and the next, the flat supplement provided by FPUC resulted in nearly half of jobless workers collecting at least as much in unemployment compensation as their prior wages. Although the simplicity of a flat UI supplement helped get crucial financial support quickly into the bank accounts of American households early in the pandemic, FPUC’s disparate impact across states due to regional wage variation and state UI program differences suggests that the program was poorly targeted.
In addition, despite tepid job growth in August, the ongoing labor market recovery has progressed significantly in recent months, calling into question whether the supplement is still needed. The unemployment rate is now 5.2%, and monthly job growth has averaged 586,000 since the beginning of the year. Between June and July, unemployment fell or remained stable in every state, and in the last full week of August, initial unemployment claims fell to a 17-month low. All this reflects strong demand for workers and more unemployed Americans intensifying their job searches, as experts project the economy will continue to grow for the rest of the year.
At the same time, the economy has faced labor supply headwinds since the spring, as millions of workers remain on the sidelines. The labor force participation rate has stagnated for more than a year—hovering between 61.4% and 61.7% since June 2020—and has failed to rebound to its pre-pandemic rate of 63.4%. As a result, businesses are struggling to find workers and, as of July 2021, there were a record high 10.9 million job openings. While a range of factors—such as the Delta variant and caregiving responsibilities—are likely preventing many from returning to work, the extra $300 supplement may also be playing a role.
Pointing to the economic recovery, Congress and the administration agreed that it was time to discontinue FPUC. But the immediate path forward for extended-length benefits and broadened eligibility for UI is less certain.
So far, state officials seem uncertain about using American Rescue Plan funds for continued UI expansion. As of September 3, no state has indicated that it will take up the administration’s offer. New Jersey, for instance, has opted to use that money for other programs instead. Some states that face spiking COVID cases may find it optimal to continue PUA and PEUC. As conditions improve, however, any state that extends these programs should aim to phase them to facilitate the economic recovery.
The emergence of the Delta variant highlights the need for states to remain nimble as public health uncertainty continues. Some states, such as Florida, Hawaii, Kentucky, and Oregon, are currently experiencing their worst outbreaks of the pandemic. Under these circumstances, extending PUA would continue to provide support to those who must temporarily stop working due to illness or caregiving requirements. Additionally, with long-term unemployment remaining historically high, continuing to provide additional weeks of payments could be beneficial. In the absence of PEUC, states typically provide 26 weeks of benefits; some allow less than 20 weeks. However, more than 3.2 million workers had been unemployed for at least 27 weeks in August, of whom nearly 2.4 million had been unemployed for at least 52 weeks. Given that long-term unemployment is associated with numerous health and social consequences, there may be a role for continuing extended UI benefits while COVID cases remain elevated.
PUA and PEUC, however, could become problematic if both are extended for too long. To mitigate COVID risks, PUA provided UI benefits to workers who quit their jobs and those not actively looking for work. In effect, this enabled workers to remain out of the labor force, which is contrary to one of UI’s principal objectives of keeping jobless workers attached to the labor market. Meanwhile, extending the maximum number of weeks that workers can receive UI benefits has been associated with longer periods of unemployment. As a result, states that continue PEUC for too long could experience higher levels of unemployment.
Unfortunately, limited data are available to better inform state policymakers’ decisions. For instance, while a Goldman Sachs study found that unemployed job searchers in states that ended their expanded UI benefits early were substantially more likely to go back to work, other analysts found that the labor market outcomes in those states differed little from those that continued the benefits. With only two months of evidence available since states started ending their UI benefits early, noise in the data may be obscuring any signals. For instance, COVID cases are generally surging more rapidly in states that ended their UI benefits early, potentially offsetting any effect on labor supply. With such little data, it remains difficult to adequately control for underlying differences such as these and to properly identify the impact that eliminating expanded UI benefits had on state labor markets.
In the face of difficult public health conditions and ongoing economic uncertainty, some states may benefit from using the American Rescue Plan funds to more gradually phase out expanded support for unemployed workers while also exploring ways to improve reemployment services to help job seekers. With millions of Americans still on the sidelines, any extensions to expanded UI should be temporary, and states should continue to prioritize helping jobless individuals get back to work.