Cutting Unemployment Insurance Cost State Economies

Job gains more than offset by decrease in consumer spending

States that reduced unemployment insurance ahead of the Labor Day expiration of federal pandemic assistance did have a larger percentage of people return to the workforce than states that continued paying people the extra $300 per week. But the move cost those states’ economies roughly $2 billion, according to analysis by economists and researchers at Columbia University, Harvard University, the University of Massachusetts Amherst and the University of Toronto.  
That’s because only about 1 in 8 people who were unemployed in April in the 19 states that cut off federal unemployment insurance in June had found a job by Aug. 6. With 7 in 8 unemployed people still unemployed and not receiving the extra benefits, consumer spending fell about 20%.  
“The main question was: Did pushing earlier to June help the local economy? And that answer seems to be mostly no,” Arindrajit Dube, an economics professor at the University of Massachusetts Amherst and co-author of the paper, told Yahoo Money. “That’s a net loss for those state economies, because this was federal dollars going into those states.”  
The 19 states collectively turned down about $4 billion in federal unemployment insurance funding and had residents reach a total of $270 million in new earnings. Unemployed people were 4.4% more likely to have found a job by the first week of August in the states that cut payments in June, but unemployment insurance payments dropped by 35%. Hiring in the states that cut benefits has peaked, so the researchers foresee a nationwide drop in consumer spending after the federal benefits expire.  
About 4 million people will lose unemployment insurance, and if the numbers hold, only half a million of them would find jobs by the end of October.  
“As a result, we could see around $8 billion in reduced spending during September and October, the paper concludes.