Unemployment Insurance Benefits Cuts Didn’t Force People Back To Work

Unemployment insurance benefits cuts did not force people back to work, research by the Economic Policy Institute found.

The July state employment and unemployment data released Friday by the Bureau of Labor Statistics (BLS) showed that the strong job growth reported earlier this month in the national jobs data was widespread throughout the country. And, notably, the states that chose not to cut pandemic unemployment insurance benefits have experienced, on average, greater job growth in recent months than states that cut benefits to unemployed workers.

Over the last three months (from April to July), all but three states—Alaska, Kentucky, and Wyoming—added jobs, with particularly strong growth in Hawaii (4.0%), Vermont (3.5%), North Carolina (2.7%), Arizona (2.6%), and New Mexico (2.5%). Figure A shows each state’s July unemployment rate and the change in employment over the past three months, 12 months, and since February 2020 (the month before the recession.) Figure A

Cutting Unemployment Insurance Benefits: Current state unemployment rate and percent change in total number of jobs over last 3 months

Note: Jobs refers to the total number of jobs, part-time or full-time, in nonfarm establishments.

*Some states listed as ‘Cut UI’ did not implement cuts by the time of the July data reference week. However, all had announced by then that they would be cutting benefits early. 

Source: EPI analysis of Bureau of Labor Statistics’ Local Area Unemployment Statistics data.

The July data also provide our first insight into state-level job growth since 26 states announced they were ending their participation in the Federal Pandemic Unemployment Compensation (FPUC) program—the extra $300 in weekly benefits for unemployed workers.

Some of these states also terminated federal Pandemic Unemployment Assistance (PUA) benefits, which gave unemployment benefits to gig workers and others who would not qualify for traditional unemployment benefits.  

These largely Republican-controlled states claimed that overly generous unemployment insurance benefits were discouraging jobless workers from accepting available work and hampering the economic recovery. There was always little evidence to support this claim; however, now there is evidence that the decision to cut federal unemployment insurance assistance has not improved these states’ recoveries.  

Between April and July, states that cut UI benefits averaged overall job growth of 0.9%. States that maintained the full federal UI benefits saw average job growth of 1.6%. Similarly, states that cut UI saw their unemployment rates decline, on average, by 0.2 percentage points, from 4.7% to 4.5%. During the same period, states that retained federal UI experienced a larger decline of 0.4 percentage points from 6.1% to 5.7%. On average, states that retained federal UI experienced a modest 0.1 percentage point increase in labor force participation since April, while states that cut UI had no change. 

These are just simple averages across the two groups of states; the differences are not huge, and there is considerable volatility in state-level estimates. We would not want to conclude at this point that these two groups of states are on significantly different recovery tracks. However, researchers who have carefully examined the trends find that, at best, the two groups of states are recovering at roughly the same pace, although unemployed workers in states that cut benefits are experiencing greater financial struggle.  

Much of the discussion around the generosity of unemployment insurance benefits and whether they might hold back employment growth has focused on trends in leisure and hospitality, a low-wage industry that was decimated last year by the pandemic. During March and April of 2020, the industry lost 8.2 million jobs—nearly half of all jobs in the industry. In the spring, as the economy reopened and demand at restaurants, hotels, and other leisure and hospitality businesses surged, many firms were understaffed. Their difficulty in rapidly staffing up to meet surging demand has fueled much of the concern about possible UI-induced labor shortages.  

The data, both national and now state-level, indicate that these concerns are overblown.

Wage growth in leisure and hospitality has accelerated in recent months—indicating that employers are needing to raise pay to fill vacancies—but there does not appear to be anything meaningfully holding back employment growth. In July, the country added 380,000 jobs in leisure and hospitality, after gaining 319,000 jobs in May and 394,000 in June. Industry employment has grown by 7.8% nationally since April. This is despite the fact that the average weekly earnings in leisure and hospitality are still only about $22,000 annually, even after recent wage gains. 

At the state level, leisure and hospitality employment has grown at a quicker rate in states that preserved full unemployment insurance benefits than in those that cut federal assistance.

From April to July, states that cut unemployment insurance benefits had, on average, 3.2% employment growth in leisure and hospitality, while states that preserved unemployment insurance benefits averaged growth of 6.5%. The only states that lost leisure and hospitality jobs over this period were Alaska (-3.6%) and Wyoming (-7.4%), both states that cut benefits. The strongest growth in leisure and hospitality since April has been in the District of Columbia (16.2%), Vermont (12.4%), Hawaii (11.6%), California (10.3%), and Massachusetts (9.4%)—all states that maintained full federal UI benefits.  

Importantly, the July data also showed sizable gains in state and local government jobs in many states. Nationally, state and local employment grew by 471,000 from April to July, with 43 states and the District of Columbia adding jobs. The fastest growth over this period occurred in the District of Columbia (22.8%), North Carolina (12.1%), Vermont (9.1%), and Hawaii (8.2%).  

Investing in public-sector jobs is a critical tool for economic recovery: After the unprecedented job losses in state and local government last year, there is a large hole to fill. To reach pre-pandemic levels, the country still needs to add more than 800,000 state and local government jobs, 375,000 of which are in education. But even this is likely inadequate.  

Before the pandemic, K-12 education employment had still not recovered from the austerity-driven collapse in K-12 jobs following the Great Recession.

As students return to in-person learning, many of whom were not supported adequately during remote learning, the need for massive investment in teachers and other support staff is clear. Fortunately, the state and local funding allocated by the American Rescue Plan (ARP) provides states with the means to hire back all the public-sector jobs that were cut last year and make new investments to ensure that state and local public services, particularly in K-12 education, are well-equipped to deal with ongoing challenges from the pandemic.  

Finally, the recent strong job numbers should be understood in the context of a highly unequal recession and recovery. Job losses during the pandemic have been concentrated among low-wage earners, with disproportionate losses in the hardest-hit industries for Black and Hispanic women, and AAPI men and women.

New research also shows that the concentration of job losses among the lowest-paid workers can be observed in almost every major industry, not just in industries with high concentrations of low-wage workers.

As of July, the unemployment rate remains particularly high for workers of color, with unemployment rates of 8.2% for Black workers, 6.6% for Latinx workers, and 5.3% for Asian workers, compared with 4.8% for white workers. Since periods of unemployment are associated with lower lifetime earnings and worse health outcomes, this recession will increase inequality by further holding low-wage workers back.  

The recovery is still far from complete.

Accounting for population growth since before the pandemic, there remains a nationwide jobs shortfall of between 6.6 and 9.1 million jobs. At the state level, the jobs shortfall is as high as 11%, with the average state roughly 5% below where we would expect it to be based on population growth since February 2020. 

At this moment, policymakers at every level of government should take action to help speed the recovery. Policymakers should prioritize efforts to bolster job growth, protect those still unable to find suitable work, and build a more equitable economy than what existed before the pandemic.

With the Biden administration signaling that there will be no federal action to renew pandemic unemployment programs beyond their expiration on September 6, state lawmakers should consider using federal ARP funds to reform their state unemployment programs to provide coverage and benefits at least as protective as the emergency federal programs. States and localities should also use ARP funds to bolster public services, particularly in K-12 education, and provide targeted economic support to low-income households who were most harmed by the recession. All of these actions would help speed the recovery.