Research has found that unemployment benefits are an unusually potent form of fiscal stimulus, because the money goes to the people who are the most likely to spend it. (Food stamps are similarly effective, for the same reason.) A recent working paper from economists at the University of Chicago and the JPMorgan Chase Institute found that spending among benefit recipients actually rose by 10 percent above their pre-pandemic level. Among low-wage workers, the increase was even greater.
“It’s not just providing insurance for these families in terms of the hardship they were experiencing due to job loss, but in fact it’s propping up consumer spending,” said Fiona Greig, one of the study’s authors.
This is a dangerous moment to begin pulling away that support, said Aneta Markowska, chief economist at the investment bank Jefferies. Real-time measures show that economic activity is declining as the virus surges in many parts of the country, forcing some states to order businesses to close back down. Other government support has already been ebbing, as loans under the Payroll Protection Program expire and the $1,200 tax rebate checks sent last spring fade into memory.
“When you look at this loss of momentum in activity, I think everyone’s tendency is just to focus on Covid, but it also corresponds to the fading of fiscal support,” Ms. Markowska said. That means the economy needs more help from the government right now, not less, she said.
It’s the lack of jobs, not the extra benefits, holding workers back.
Economists think about unemployment insurance in terms of the “replacement rate” — the share of workers’ previous earnings that they get in unemployment benefits. Before the pandemic, the average replacement rate in the United States was around 45 percent, meaning that a worker who earned $1,000 per week could expect to get around $450 in weekly benefits. But the rate was far lower in some states, especially in the South; in Mississippi, the maximum weekly benefit is $235.
The $600 a week in extra benefits have pushed replacement rates above 100 percent in much of the country. Research from a team of economists at the University of Chicago estimated that two-thirds of jobless workers could make more on unemployment than they were able to earn while working. One in five workers would earn twice as much.
In normal times, economists worry that if unemployment benefits are too generous, they could discourage workers from seeking new jobs. But that is less of a concern when the unemployment rate is high and jobs are scarce. A recent analysis by Ernie Tedeschi, a former Treasury Department official and an economist at Evercore ISI Research, found no evidence that the extra benefits were discouraging people from returning to work.