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.