Will the Early Ending of the Extra $300.00 UI Benefit Lower U.S. Unemployment Rates?

Despite the rise in Initial Unemployment Claims for the week ended on July 17, 2021, the downtrend from the start of the year remains encouraging. And from an economic perspective, it would be reasonable to assume that reducing the financial incentive to stay at home for lower-income workers would boost employment levels. For example, an individual earning a minimum wage of $7.25 or lower (as is the case in 20 U.S. States) might be motivated to stay at home if they received $250.00 in regular UI benefits plus $300.00 in enhanced benefits, i.e., $550.00 per week. By way of comparison, at a $7.25 wage rate, that same individual working 40 hours per week would earn just $290.00 per week while also incurring commuting and possibly childcare expenses.

Nonetheless, many wonder what will happen in the 26 states that have elected to end the enhanced Unemployment Insurance (UI) benefits, pandemic relief, and extended benefits before the Sept. 6, 2021, deadline. Unfortunately, the decision to work is also motivated by other factors. These include the health concerns of individuals and the availability of childcare. During the pandemic, many childcare establishments went out of business and have been unable to reopen. If the Covid-19 variant were to become prevalent, it would discourage more individuals from returning to work due to virus concerns or to take care of family members that may have contracted the virus.

Getting back to the effects of the extra $300.00 in UI benefits, we know that it also plays a more significant role in low minimum wage states. That occurs because these benefits make up a larger share of total compensation in states with a lower minimum wage. The good news is that in the 26 states that have opted to terminate the enhanced UI benefits, 57% of those states pay a minimum wage of $7.25 or lower compared to 39% of all U.S. states and Washington, DC that pay a minimum wage of $7.25 or lower.

That suggests a greater incentive to return to work in those 26 states versus other states like New York, California, Oregon, and Washington, DC. These latter four jurisdictions pay an average minimum wage rate of $13.22 per hour. California tops this list with a minimum wage of $14.00 per hour, and the figure is $12.50 in New York. Incidentally, New York City pays a minimum wage of $15.00 per hour.

So, if we focus only on the extra $300.00 UI benefit, we could track what happens as these 26 U.S. states end this benefit starting in June 2021 while other states will end it July 2021 or August 20211. With 26 states beginning to eliminate the enhanced benefits, a reasonable assumption might be that individuals in these states could start looking for jobs sooner and even take them if a good opportunity comes along. Given that this process is just beginning, we decided to compare the change in the unemployment rate in these 26 states from May 2021 to June 2021 in these targeted states and compare the results with the national average across the entire U.S. economy.

The results revealed a better outcome in the 26 states that have announced the early termination of the enhanced UI benefit. Specifically, across those 26 states, 6 reported no change, 9 reported an average decline of 0.2%, and the remaining 10 reported an average increase of 0.1% in the unemployment rate from May 2021 to June 2021. The results across the 26 states revealed no average change in the unemployment rate from May 2021 to June 2021, while the national unemployment rate rose from 5.8% to 5.9% over the same period.

We look forward to carefully watching this data over the next couple of months to see if we could identify a wider disparity between labor market outcomes in these 26 states versus the national economy. Additionally, we plan to look at changes in the labor force. If we see a surge in the labor force as more individuals decide to return to work, it could temporarily boost the unemployment rate. Ironically, that would be a positive outcome as it would eliminate many of the current worker shortages that firms are currently experiencing. Finally, we must admit that unemployment rates could still move higher regardless of what happens to these enhanced UI benefits if safety concerns associated with Covid-19 or childcare issues become more challenging again.