Consumption Effects of Unemployment Insurance during the Covid-19 Pandemic
As families and individuals grapple with the financial impact of the COVID-19 pandemic, unemployment insurance (UI) benefits are playing a larger role in the US. uu. economy than ever. In normal times, UI benefits make up just 1 percent of total wages. During the Great Recession, the UI system was expanded to pay benefits equal to 2.5 percent of wages. in May 2020, total benefits were equal to 14.6% of total wages, more than five times the peak of the great recession.
There are three forces at play that cause the user interface to play this outsized role in our economy. First, many workers lost their jobs at once, resulting in an unprecedented increase in the number of regular unemployment claims. Second, the Coronavirus Aid, Relief, and Economic Security (Care) Act, enacted by the federal government in March 2020, created the Pandemic Unemployment Assistance Program that expanded UI benefits to many previously ineligible unemployed workers. for the UI, including self-employed workers, independent contractors, and temporary workers. This means that more workers are eligible to receive UI. Third, the Care Act also added a $600 weekly supplement to the amount of state unemployment benefits, known as the federal Pandemic Unemployment Compensation (FPUC) program. this increased the level of ui benefits. As a result, researchers estimate that approximately two-thirds of unemployed workers are eligible for UI benefits that exceed their wages (Ganong, Noel, and Vavra 2020).
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given the new centrality of unemployment insurance in the us. uu. economy, it is imperative to understand its economic effects. Research has shown that in normal times, spending among UI recipients drops by about 7 percent in response to unemployment because typical UI benefits replace only a fraction of lost earnings (Ganong and Noel 2019). However, data limitations mean that there is virtually no research studying the effect of UI on individual households and the broader economy during the pandemic. Household survey data sets measuring the role of UI are years away from being published, and more contemporary private sector data sets used by other researchers during the pandemic combine measures of the unemployed and employed. therefore, this report provides the first estimates for the specific consumption of unemployed households during the pandemic.
Unemployment benefits play an important role in providing individual insurance and helping households maintain consumption during unemployment. UI benefits also play an important role as automatic stabilizers that provide macroeconomic stimulus during downturns. even without policy changes, such as those made through the care law, aggregate government transfers through unemployment insurance rise with the level of aggregate unemployment. Since UI recipients have a high marginal propensity to consume (MPC), this in turn can help stabilize aggregate demand. Because total UI transfers are now five times larger than during previous recessions, the current potential effects of UI on aggregate demand far outweigh the effects in those earlier recessions.
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We explore the effects of ui during the pandemic by measuring ui recipients’ consumption relative to their pre-unemployment baseline levels and also relative to their consumption immediately before the start of benefits. In normal times, delays between the start of unemployment and the start of UI benefits are typically minimal, but anecdotal evidence suggests that claimants have experienced delays in receiving benefits due to high volume of claims and the potential for fraud. during the pandemic. Examining changes in income and consumption prior to receiving UI allows us to explore the extent and consequences of such lags on well-being. Comparison with consumption after UI benefits begin allows us to understand the role of benefits in stabilizing household balance sheets and boosting aggregate demand once they are received.
Our key findings are two. Our first finding is that during the pandemic, while total employee spending fell by 10%, spending by unemployment benefit recipients increased by 10%, a pattern that is likely explained by the $600 weekly federal supplement. At the same time, our second finding is that among the unemployed who experience a substantial delay in receiving benefits, spending falls by 20 percent, a drop not seen by those receiving benefits more immediately after job loss. therefore, receiving unemployment insurance is an effective means of insuring the unemployed against welfare losses associated with job loss when delivered on time. With the $600 federal benefit supplement through the FPUC program, UI has not only helped unemployed households smooth consumption, it has also helped stabilize aggregate demand.