Economic Effects Of Additional Ui Benefits Of 600 Per Week
Summary
A letter of June 4, 2020 from the Director of the Congressional Budget Office, Phillip L. Swagel, to Senator Charles Grassley, Chairman of the Senate Committee on Finance, on the economic effects of additional unemployment benefits of $600 per week. CBO examines extending the temporary $600 per week increase, in place through July 31, 2020 under the CARES Act, for six months through January 31, 2021. It estimates that roughly five of every six recipients would receive benefits exceeding what they could expect to earn from work, that output would probably be greater in the second half of 2020 but lower in calendar year 2021, and that employment would be lower in both periods. The letter reports background figures including an unemployment rate of 16 percent in the third quarter of 2020 and maximum weekly regular benefits ranging from $235 in Mississippi to $823 in Massachusetts.
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CONGRESSIONAL BUDGET OFFICE Phillip L. Swagel, Director
U.S. Congress
Washington, DC 20515
June 4, 2020
Honorable Charles Grassley
Chairman
Committee on Finance
United States Senate
Washington, DC 20510
Re: Economic Effects of Additional Unemployment Benefits of $600 per
Week
Dear Mr. Chairman:
At the request of your staff, the Congressional Budget Office has examined
the economic effects of extending the temporary increase of $600 per week
in the benefit amount provided by unemployment programs. Under the
Coronavirus Aid, Relief, and Economic Security (CARES) Act, that
increase in unemployment benefits is in place through July 31, 2020.1 CBO
estimates that extending that increase for six months through January 31,
2021, would have the following effects:
Roughly five of every six recipients would receive benefits that
exceeded the weekly amounts they could expect to earn from work
during those six months.
The amount, on average, that recipients spent on food, housing, and
other goods and services would be closer to what they spent when
employed than it would be if the increase in unemployment benefits
was not extended.
1
See Congressional Budget Office, cost estimate for H.R. 748, the CARES Act, Public Law 116-
136 (April 16, 2020, revised April 27, 2020), www.cbo.gov/publication/56334; and Julie M.
Whittaker and Katelin P. Isaacs, Unemployment Insurance: Legislative Issues in the
116th Congress, Report R45478, version 10 (Congressional Research Service, April 10, 2020),
https://go.usa.gov/xwCCP.
www.cbo.gov
Honorable Charles Grassley
Page 2
The nation’s economic output would probably be greater in the
second half of 2020 than it would be without the extension of the
increase; in calendar year 2021, however, output would be lower
than it would be without the extension.
Employment would probably be lower in the second half of 2020
than it would be if the increase in unemployment benefits was not
extended; in calendar year 2021, employment would be lower than it
would be without the extension.
The estimated effects on output and employment are the net results of two
opposing factors. An extension of the additional benefits would boost the
overall demand for goods and services, which would tend to increase output
and employment. That extension would also weaken incentives to work as
people compared the benefits available during unemployment to their
potential earnings, and those weakened incentives would in turn tend to
decrease output and employment.
In the second half of 2020, CBO estimates, the signs of the effects would
probably be opposite: Output would be greater and employment lower—
because workers employed as a result of the boost in demand would have
higher average earnings (and contribute more to output) than the people
who were not employed (because of the extension’s effect on work
incentives) would have had if they were employed. The following
simplified illustration shows how output could increase while employment
fell: As a result of the extension of the additional benefits, a group of
workers with average earnings became employed, and a group twice as
large whose earnings would have been less than half the average amount
were not employed.
In calendar year 2021, both output and employment would be lower than
they would be if the increase in unemployment benefits was not extended.
That would occur mainly because the effect of the reduced labor supply
would, in CBO’s assessment, last longer than the effect of increased overall
demand.
To respond rapidly to your questions, in this letter CBO discusses the
direction of the effects of additional unemployment benefits but not the
magnitude of those effects. The agency is continuing to develop its capacity
to quantify the effects of changes in different types of unemployment
benefits.
Honorable Charles Grassley
Page 3
Background
In CBO’s projections, the number of unemployed people remains high after
the $600 per week benefit expires at the end of July. In the third quarter of
2020, an average of 25 million jobless people per week are available for
work and are either seeking work or expecting to be recalled from a
temporary layoff, and the unemployment rate is 16 percent.
Unemployment benefits are provided through a partnership between the
federal government and state governments that provides a weekly payment
to qualifying unemployed workers. To qualify for unemployment benefits
through the unemployment insurance system, most workers must have lost
their job through no fault of their own. In addition, the CARES Act created
Pandemic Unemployment Assistance (PUA) to provide benefits to the self-
employed and others who are working less or not at all for reasons related
to the 2020 coronavirus pandemic.
Almost all current recipients of unemployment benefits can receive them
through at least December 31, 2020, and depending on the circumstances,
many may continue to receive benefits after that date. For example, workers
in most states in which the unemployment rate is high enough are eligible
for up to an additional 13 weeks of benefits.
Each state administers its unemployment insurance program within
guidelines established by federal law. The number of weeks that a person
can receive unemployment insurance benefits varies from state to state.
PUA benefits are available for up to 39 weeks. The amount of weekly
benefits depends on the minimum benefit and an individual’s prior
earnings. The minimum unemployment insurance benefit amount varies by
state. The minimum PUA benefit equals half of the state’s average weekly
benefit from regular unemployment insurance in four recent quarters.
Higher earners receive larger benefits, up to a maximum amount.
Maximum regular benefits per week for a single person, for example, range
from $235 in Mississippi to $823 in Massachusetts.
Effects on the Ratio of Benefits to Potential Earnings
Before the pandemic, the ratio of unemployment insurance benefits to prior
earnings generally ranged from 30 percent to 50 percent. Workers with
higher earnings were at the lower end of that range, in part because of the
cap on weekly benefits. Prior earnings are a strong predictor of the potential
earnings any given person would have if he or she was reemployed.
However, it is the ratio of benefits to potential earnings that is key to
understanding incentives to work.
Honorable Charles Grassley
Page 4
Potential earnings in 2020 and 2021 for people who have permanently lost
jobs are lower, on average, than their prior earnings, primarily because
some knowledge that has value only to the previous employer is no longer
productive. People who are expecting to be recalled from a temporary
layoff also have lower potential earnings than their prior earnings, on
average, mainly because some of them will not end up returning to their
previous job.
If the benefit of $600 per week was extended through January 2021,
benefits would exceed 100 percent of potential earnings for roughly five of
every six recipients of unemployment benefits from August 2020 to
January 2021, CBO projects. For example, a single worker would have a
ratio of benefits to potential earnings of 100 percent if his or her potential
earnings were $21 per hour for 40 hours a week in Mississippi or $30 per
hour for 40 hours a week in Massachusetts. For people with much lower
potential earnings, that ratio is much higher.
If the benefit of $600 per week was extended, fewer than one in thirty
recipients would receive benefits—generally the maximum amount in their
state—that were less than 50 percent of their potential earnings, CBO
projects. For example, for the ratio to be 50 percent for a worker in
Mississippi, the worker’s potential earnings would have to be about $42 per
hour for 40 hours a week; the potential earnings of a worker in
Massachusetts with that same ratio would be about $71 per hour for 40
hours a week.
Effects on Consumption
When people become unemployed, they generally consume fewer goods
and services. To pay for food, housing, and other living expenses while
unemployed, people can draw on their savings, borrow money, sell assets
(such as cars or jewelry), or use funds received from other people or the
government. Many unemployed people have little or no savings and would
face high interest rates on loans. Some people could draw on retirement
savings: The CARES Act allows people affected by the pandemic to
withdraw from tax-preferred retirement savings accounts without incurring
a tax penalty.
The additional $600 per week in unemployment benefits under current law
allows people to continue to consume goods and services that they might
otherwise be unable to afford and to save for future contingencies. The
average amount that recipients spend on food, housing, and other goods and
services is, in CBO’s assessment, closer to what they spent when employed
Honorable Charles Grassley
Page 5
than it would be without those additional benefits. CBO anticipates that if
the additional $600 per week was extended to the end of January 2021, that
pattern would continue—in part, because the extension would allow people
to make more payments on loans and therefore have greater access to credit
in the future than they would have otherwise.
Funding the additional unemployment benefits would, however, increase
the federal budget deficit. In CBO’s assessment, larger deficits tend to slow
the growth of the economy in the long term, thereby reducing overall
income and the consumption of goods and services in the future.
Effects on Output
Output is affected by both the overall demand for goods and services and
the supply of labor. In the short term, unemployment benefits boost the
former and reduce the latter.
Spending of unemployment benefits on consumption spurs demand for
goods and services and, as a result, boosts production. Most of that effect
occurs near the time that the benefits are received. The effect is stronger,
CBO estimates, when the economy is weak and the Federal Reserve does
not act to reduce potential inflation by dampening the effect of fiscal policy
on the economy.
Because businesses’ decisions about investing and hiring depend on the
demand for their products, increased demand and production leads to more
investment and hiring. In the short term, the increased spending from the
additional benefits would have a much larger effect on output than would
the increased deficits; in the longer term, those deficits would drive interest
rates up—lowering investment and the economy’s maximum sustainable
output.
Receipt of unemployment benefits also weakens the incentives of recipients
to search for and take jobs and the incentives of firms to quickly recall
workers from a temporary layoff, especially when benefits exceed a
recipient’s potential earnings and when going to work increases risks to a
recipient’s health. A reduction in the supply of labor causes some
machinery and equipment to be underused and some people to be in jobs
that are not as well-matched to their skills—making it more costly for
businesses to produce goods and provide services. As a result, some
businesses set wages higher than they would have without the benefits.
Some businesses reduce their output and raise their prices above what they
would otherwise have been, and others close. Over the longer term, some
Honorable Charles Grassley
Page 6
businesses begin to use machinery and equipment that allows them to use
less labor.
How changes in incentives to work affect output varies over time and
depends on economic conditions. In April 2020, at the peak of social
distancing across the country, the weaker incentives for the unemployed to
work probably had little effect on output because so many businesses were
closed. When a large number of job seekers who do not receive
unemployment benefits (including people who had recently been out of the
labor force) are available for every open job, the effect of unemployment
benefits on output also tends to be small. CBO expects that for every open
job in the second half of 2020, the number of job seekers who are not
receiving unemployment benefits will be small, on average, making the
effect of those benefits on output larger. If the $600 per week increase in
benefits ended in January 2021, it would nonetheless continue to affect the
supply of labor afterward because it would take time for recipients of those
benefits to find work.
Whether additional unemployment benefits increase or decrease output
depends on the relative size of the effects on the demand for goods and
services and on the supply of labor. In the second half of 2020, the increase
in demand from the additional $600 per week in unemployment benefits
would, in CBO’s assessment, probably boost output more than the
reduction in the supply of labor stemming from those benefits would reduce
it. In calendar year 2021, the net effect of the additional benefits would be
to reduce output, CBO estimates.
Effects on Employment
The main factors affecting employment in CBO’s analysis are the same as
those affecting output: overall demand for goods and services and
incentives to work. In CBO’s assessment, a boost in overall demand from
the additional unemployment benefits increases employment of people
who, on average, have higher potential earnings than the people who would
not be working because of the weaker work incentives stemming from
those benefits. Also, the effects on the supply of labor from weaker work
incentives differ according to workers’ potential earnings. The additional
$600 per week in benefits decreases the incentive to work more for people
who expect to have lower earnings than it does for people who expect to
have higher earnings because that additional amount is a larger percentage
of lower-earning workers’ potential earnings.
Honorable Charles Grassley
Page 7
The effects on employment of extending the additional benefits are
measured in numbers of people, and each worker is weighted equally. The
effects on output are measured in dollars, and each worker’s supply of labor
is weighted by his or her contribution to that output. Because the reductions
in employment stemming from weaker incentives to work would come
from people who, on average, had lower potential earnings than the people
who became employed as a result of the boost in demand for goods and
services, the direction of the total effect on employment could differ from
the direction of the total effect on output.
In CBO’s assessment, the extension of the additional $600 per week would
probably reduce employment in the second half of 2020, and it would
reduce employment in calendar year 2021. The effects from reduced
incentives to work would be larger than the boost to employment from
increased overall demand for goods and services.
Comparison With CBO’s Previous Estimates
Per dollar, CBO estimates, the effects on output and employment of an
additional $600 per week of unemployment benefits would not be as large
and positive as the agency previously estimated they would be for a dollar
of unemployment insurance benefits when, in 2012, it analyzed the effects
of extending the period for which workers could receive benefits.2 A
comparison of this analysis with that previous analysis of additional outlays
for unemployment benefits indicates that, on a per-dollar basis, increasing
benefit amounts would reduce the supply of labor by more than would
extending the length of time that a worker could receive benefits—
especially when benefits exceed the estimated amount that a worker would
earn if he or she was employed. Also, the reduction in the supply of labor is
greater when a larger fraction of potential workers are receiving
unemployment benefits, as is the case now compared with the previous
analysis. In addition, the estimated effects on overall demand per dollar of
benefits are smaller than they were in the previous analysis because the
possibility of social distancing and concerns about the pandemic increase
savings and reduce spending on goods and services.
Effects of Other Types of Increases in Unemployment Benefits
The effects of increasing unemployment benefits could differ if the added
benefits were structured in some other way. If, for instance, the addition to
unemployment benefits was proportional to previous earnings up to some
2
See Congressional Budget Office, Unemployment Insurance in the Wake of the Recent Recession
(November 2012), www.cbo.gov/publication/43734.
Honorable Charles Grassley
Page 8
maximum amount rather than a fixed dollar amount, CBO expects that for a
given dollar of outlays on unemployment benefits, less support for
consumption would be provided to people who previously had low
earnings. Also, the effects on output and employment would probably be
more positive because a proportional benefit would not create especially
weak incentives to work for people with low potential earnings.
Some states might have difficulty implementing such a proportional
change. Also, states generally do not have consistent data about the prior
earnings of self-employed people and many others receiving PUA benefits,
which would be necessary to apply a proportional change for those people.
States that could implement a proportional change could also combine it
with a fixed additional amount. CBO has not examined the economic
effects of such approaches in detail.
Further Questions
I hope this information is helpful to you. If you have further questions,
please contact me directly.
Sincerely,
Phillip L. Swagel
Director
cc: Honorable Ron Wyden
Ranking Member
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