Will Cutting Unemployment Benefits Bring Workers Back?

Everyone is talking about the worker shortage that many employers are experiencing this summer. Some knuckle heads have even suggested it’s a good thing. And, everyone has a favorite explanation — those gosh darn extra unemployment benefits. Indeed, whenever I hear people talk about the labor shortage, these benefits comes up. But, is this explanation actually true? Is there evidence that getting rid of some of these benefits will cause workers to flood back into work? Let’s have a look.

A Sort of “Natural Experiment”

I have to be honest, as a rule, I don’t believe anything I hear. These days, it’s a good practice. But, the idea that these benefits keep workers at home makes sound economic sense. In any model of job search, larger unemployment benefits keep workers at home longer. (They also help workers wait until they find better jobs, but that’s for another post). The question is: are these benefits really a key part of the labor shortage this summer? Or just a small part?

Luckily, we don’t have to wonder anymore. In June, over 20 states let key parts of the extended unemployment benefits lapse, including the $300 dollar weekly supplement. Another five states waited until July. Most other states are waiting until September. The map below shows the June expiring states in red, the September ones in Blue, and leaves the July ones blank (because I am going to exclude them from the analysis below).

A situation like this gives us a nice chance to do a bit of a natural experiment. How much did the states in red see employment go up from May (before the expiration) to July (after the expiration)? And, was this increase more than for the blue states? Let’ see.

Figure 1. States That Reduced Unemployment Benefits in June (Red) versus September (Blue)

Source: NYTimes, June 15, 2021.

What do the Data Say on Reducing Unemployment Benefits?

I’ll keep this short. According to the Current Population Survey, there was no difference in how labor force participation changed in the benefit cutting versus maintaining states on the map above.

Figure 2. Labor Force Participation among Individuals Age 16-64, June 2020-July 2021

Note: Excludes states where benefits expired in July. Source: Author’s analysis of University of Minnesota, CPS-IPUMS.

In cutting states, the labor force participation rate — the number of workers either working or looking for work — increased 1.5 percentage points, or about 2.1 percent. In non-cutting states, the numbers were 2.0 percentage points or 2.8 percent. If anything, states that kept the benefits saw their labor forces expand slightly faster. Just a thought: maybe taking money away from people without jobs isn’t so good for the retail and restaurant sector.

A quick note: why did I choose to look at labor force participation and not the unemployment rate? Well, the argument goes that these benefits keep people from wanting to find a job. And, remember, people only count as unemployed if they are looking for work. But, lest you think I am pulling one over on you: the unemployment rate was unchanged in both groups of states over this period.

So, the next time someone complains about unemployment benefits causing a labor shortage please remind them: the data don’t quite agree.

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