Will cutting off federal unemployment benefits shake up the job market?


Economists on Wall Street and in Washington will be parsing employment data Friday for any hint at whether workers are prodded back into the labor market as federal unemployment insurance benefits are cut off.

This will be the first jobs report that may reflect an increase in labor supply and hiring from the loss of benefits, because about half of the states had ended a $300-a-week federal supplement by the time of data collection. That money expires at a federal level on Sept. 6, but some states — all but one led by Republicans — began to curtail the federally funded support in mid-June, at the tail end of that month’s labor market survey.

Friday’s report will offer only high-level numbers, figures on industries and data on demographic groups, so analysts may have to wait until state-by-state data are released in mid-August to compare the places that cut off the $300 supplement with those retaining it.

Many businesses have blamed generous unemployment benefits for inducing workers to remain out of work. That is why many states ended the benefit early. The Biden administration has been loath to say the added benefit discouraged work, but is allowing it to lapse. The infrastructure plan being considered by the Senate would be funded in part by unused appropriations for jobless benefits.

But it’s unclear to what extent the aid cutoff will prod people back into the job market. It has been difficult to judge from up-to-date data — like jobless claims — whether more workers are searching for positions as the help ends.

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“So far, the claims data don’t show overwhelmingly clear evidence that there is a meaningful reaction in the labor market when states have ended the pandemic-related unemployment insurance programs,” Daniel Silver at J.P. Morgan wrote in a recent note. He added that in some places cutting off federal aid, continuing claims had fallen “more noticeably” than elsewhere.

Analysts at Goldman Sachs found little difference in the June jobs data between states that ended federal jobless benefits early and those that did not. While the cutoff in federal benefits by some states had just begun when the June survey was conducted, the prospective loss of income might have nudged workers to search for jobs.

“While workers in these states knew the policy was ending soon and could have responded pre-emptively, the full effect of expiration on official employment measures should not be fully visible until the July report,” Ronnie Walker, a Goldman economist, wrote in a research note on July 17. At the time, Goldman thought the cutoff might add as many as 150,000 jobs to the data being released Friday, based on early state-level figures.

Some economists are skeptical that the loss of benefits will greatly affect the labor market.

Deutsche Bank analysts have said the role of unemployment insurance benefits in discouraging people from returning to work seems limited.

“There is limited evidence that UI benefits have been a primary factor weighing on employment,” Matthew Luzzetti and his colleagues wrote in a recent analysis. They pointed out that job growth had been strong in low-wage sectors where employers should be competing with the benefit, and that those sectors had similar patterns in job openings relative to new hires that other sectors had shown.

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Mr. Luzzetti said in an email that he did not expect the early cutoff of federal benefits in some states to have a meaningful effect on the July jobs figures.

And Luke Tilley, Wilmington Trust’s chief economist, wrote in a research note that employment numbers released by the payroll and data company ADP on Wednesday — which showed disappointing job growth — suggested that “the expiry of federal unemployment insurance benefits (which has now occurred in nearly 50 percent of states) will not be an immediate panacea for labor shortages.”

While ADP figures are often out of line with the monthly Labor Department numbers, and may be especially so this time because of seasonal adjustments, they can signal direction.

Still, many economists will watch hiring categories like leisure and hospitality this month for any sign that people are surging back to work as benefits end.

Luke Pardue, economist at the payroll platform Gusto, found in a recent analysis of the company’s data that hiring in small service businesses hadn’t been helped overall in states that ended federal benefits early — though it may have tilted toward older workers and away from teenagers.



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