How Did COVID-19 Unemployment Insurance Benefits Impact Consumer Spending and Employment?

How Did COVID-19 Unemployment Insurance Benefits Impact Consumer Spending and Employment?

June 24, 2022
How Did COVID-19 Unemployment Insurance Benefits Impact
Consumer Spending and Employment?
The COVID-19 pandemic dramatically disrupted the
 PUA uniquely expanded the population eligible for UI
economy with mass layoffs and business closures. The
to include the self-employed, gig workers, and others
economy was shocked with stay-at-home and shutdown
not previously eligible for UI or those unable to work
orders designed to limit person-to-person contact. These
for certain COVID-19-related reasons. PUA payments
restrictions on the flow of labor and commerce reduced
totaled $131.2 billion.
economic demand. They also increased the number of
workers unable to work. Additionally, the increased
Research on the COVID-19 UI Benefits
workplace hazards created by the COVID-19 pandemic
An emerging research literature leverages new and rich
further limited certain jobseekers’ options for employment,
sources of data to examine both (1) the role that COVID-19
creating unusual shifts in the labor market. Congress
UI benefits—particularly FPUC and PUA—played in
recognized the potential threat that such massive earnings
boosting spending and consumption in U.S. households that
losses posed to the national and global economy and
experienced unemployment and (2) whether the
responded by augmenting the joint federal-state
supplemental UI benefits decreased the likelihood that
Unemployment Insurance (UI) system to maintain the
unemployed workers found work.
economy, among many other measures that provided
income support. Recent studies have examined the impact
A strength of recent studies is their use of new sources of
of these UI expansions on consumer spending and
data to evaluate UI impacts, particularly on personal
employment.
consumption patterns. Measuring the personal consumption
response to government programs is traditionally
UI Benefits During the Pandemic
challenging. Data on consumption are scarce and often
Congress enacted key changes in the UI system in response
contain significant measurement error, which makes
to the high levels of unemployment resulting from the
statistical inference difficult and imprecise. The research
COVID-19 pandemic and recession (February 2020 through
discussed below, however, benefits from new proprietary
March 2020). Typically, the UI system provides income
data sources that harness anonymized bank account and
support to unemployed workers through weekly benefit
lending data to provide weekly information on income,
payments. UI payments help (1) provide temporary partial
spending, and employment. Additionally, the research uses
wage replacement to involuntarily unemployed workers and
another new source of household level data: the Household
(2) stabilize the economy during recessions. Permanent-law
Pulse Survey, an experimental weekly survey conducted by
UI programs—Unemployment Compensation (UC) and
the Census Bureau in collaboration with several federal
Extended Benefits (EB)—automatically respond to layoffs
agencies that includes information on individuals’
and business closures. However, unprecedented job loss
employment status, spending patterns, food security,
during the COVID-19 pandemic prompted Congress to
housing, physical and mental health, access to health care,
enact a series of extraordinary measures: Federal Pandemic
and application for and receipt of benefits. Some studies of
Unemployment Compensation (FPUC), Pandemic
employment effects are also strengthened by the ability to
Emergency Unemployment Compensation (PEUC), and
analyze job applications to an online jobs platform.
Pandemic Unemployment Assistance (PUA).
However, research findings related to the impact of the
These UI measures helped to maintain consumer spending
COVID-19 UI benefits may not be generalizable to other
and stabilize the economy during this period. PEUC was
periods or labor market conditions. The COVID-19
similar to congressional actions taken in previous
recession was created by an abrupt, exogenous shock
recessions as it extended the availability of regular UC
attributed to public health and safety concerns rather than a
benefits (available for up to 26 weeks) for up to an
series of economic stresses, which are associated with a
additional 49 weeks. However, two of these interventions,
more typical recession. Additionally, the federal response to
FPUC and PUA, were unprecedented when compared to
the pandemic included several other forms of assistance to
responses during previous recessions.
employers and employees—such as the Payment Protection

Program, the Employee Retention Tax Credit, and
FPUC provided a weekly supplement on top of all UI
Economic Impact Payments to households—that may also
benefits. FPUC provided a $600 weekly supplement
have affected personal consumption and the incentives for
between April and July 2020 and was reauthorized at
employment. COVID-19-specific factors, such as the
$300 weekly from January 2021 through the beginning
availability (or scarcity) of vaccines, childcare, and in-
of September 2021. FPUC payments from April 2020
person school, may have also contributed to unusual
through September 6, 2021, totaled $442.3 billion.
patterns in returning to work during this period.
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How Did COVID-19 Unemployment Insurance Benefits Impact Consumer Spending and Employment?
Consumer Spending and COVID-19 UI Payments
While the recent research studies did find that the expanded
One of the primary objectives of UI is to alleviate the
UI benefits had disincentive effects on working, the impact
hardships that result from loss of wages during
was smaller than expected when compared to estimates
unemployment. Typically, UI benefits replace up to 50% of
based upon models from prior recessions and non-
previous earnings, temporarily supporting workers’ basic
recessionary periods. Marinescu et al. (2021) reported that
needs, but UI benefit recipients’ expenditures are often
although the weekly $600 FPUC substantially decreased
lower than when they were employed. Without UI, the
applications to an online jobs platform, labor demand was
unemployed are more likely to report that they are
unusually depressed, and thus FPUC had little impact on
experiencing food and housing insecurity and are more
employment levels. Similarly, Ganong et al. (2021), using
likely to exhaust personal savings, sell assets, draw upon
bank account data, found a smaller negative impact on
retirement savings, and further reduce expenditures. Using
employment than expected. They observed that a high level
a range of data sources, recent studies indicate that COVID-
of employees being recalled to work by their former
19 UI payments played a key role in supporting
employers helped reduce the disincentive effects of the
consumption and general economic security of households.
$600 FPUC payment on employment. Furthermore, they
found that after the $600 payments ended, most individuals
Using Household Pulse Survey data, Carey et al. (2021)
did not exit unemployment despite a precipitous drop in
found that unemployed individuals who did not receive UI
their weekly income, suggesting that other factors were
benefits were more likely (than those who received UI) to
impeding employment. Coombs et al. (2021) found that it
report food insecurity, housing insecurity, and difficulty in
was the termination of the underlying UI benefit rather than
meeting household expenses. A working paper by Ganong
the loss of the $300 FPUC payment that increased the
et al. (2021) using bank account data found that once
likelihood of reemployment. Greig et al. (2021) found that
COVID-19 UI payments were deposited into workers’
PUA recipients were younger, had lower income, and were
accounts, spending immediately rebounded at or above pre-
more likely to have worked in non-traditional jobs or self-
unemployment levels (a result that is in contrast to
employment but had similar reemployment responses to
generally suppressed consumption patterns in previous
those receiving regular UC benefits.
recessions). Holzer et al. (2021) found that, in states that
terminated FPUC and PUA early, the unemployed were
References
five percentage points more likely to report difficulty
CRS Report R46687, Unemployment Insurance (UI)
paying for expenses than in states that continued the
Benefits: Permanent-Law Programs and the COVID-19
benefits. Similarly, Coombs et al. (2021) used payday loan
Pandemic Response.
data to examine consumption patterns of low-income
Carey, Patrick et al. “Applying for and Receiving
individuals who were receiving COVID-19 UI benefits
Unemployment Insurance Benefits During the Coronavirus
immediately before early state terminations of these
Pandemic.” Monthly Labor Review (September 2021).
benefits. These researchers found that the loss of benefits
led to an average 20% reduction in consumption.
Coombs, Kyle et al. “Early Withdrawal of Pandemic
Unemployment Insurance: Effects on Earnings,
UI and Disincentives to Work
Employment and Consumption.” Harvard Business School,
The timing, generosity, and duration of UI benefits can
Working Paper (August 2021).
influence job search behavior of the unemployed. There is
Ganong, Peter et al. “Spending and Job Search Impacts of
existing evidence that higher benefit levels and lower
Expanded Unemployment Benefits: Evidence from
thresholds for benefit eligibility can cause recipients to be
Administrative Micro Data.” Becker Friedman Institute,
less willing to accept a job (and thus increase spells of
Working Paper (February 2021).
unemployment). However, previous economic research
Ganong, Peter et al. “US Unemployment Insurance
generally found that the employment disincentive effect of
Replacement Rates During the Pandemic.” Journal of
UI during recessionary periods is relatively small, as job
Public Economics, vol. 191, no. 104273 (September 2020).
openings are limited; thus, UI income is not a particularly
Greig, Fiona et al. “When Unemployment Insurance
large contributor to high unemployment rates.
Benefits are Rolled Back: Impacts on Job Finding and the
During the COVID-19 pandemic response, weekly UI
Recipients of the Pandemic Unemployment Assistance
benefits often provided significantly higher levels of
Program.” JPMorgan Chase & Co. Institute (July 2021).
income replacement compared to previous recessions.
Holzer, Harry J. et al. “Did Pandemic Unemployment
Ganong et al. (2020) estimated that from April to July 2020,
Benefits Reduce Unemployment? Evidence From Early
the combination of the $600 weekly FPUC supplement plus
State-Level Expirations in June 2021.” NBER, Working
the regular UI payment replaced more than 100% of pre-
Paper no. 29575, December 2021.
pandemic earnings for more than 75% of UI beneficiaries.
Marinescu, Ioana et al. “The Impact of the Federal
The estimated replacement rate for workers receiving the
Pandemic Unemployment Compensation on Job Search and
$600 FPUC varied significantly, with a median replacement
Vacancy Creation.” NBER, Working Paper no. 28567,
rate of 145% and a median replacement rate of over 300%
March 2021.
for UI beneficiaries with the lowest 10% of earnings. These
changes (if implemented during a typical recession) would
Julie M. Whittaker, Specialist in Income Security
have been expected to substantially dampen the incentive
Katelin P. Isaacs, Specialist in Income Security
for workers to find employment.
IF12143
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How Did COVID-19 Unemployment Insurance Benefits Impact Consumer Spending and Employment?

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