This research brief was adapted from “Did Pandemic Unemployment Benefits Increase Unemployment? Evidence from Early State-Level Expirations,” by Glenn Hubbard from Columbia Business School, Harry J. Holzer from Georgetown University’s McCourt School of Public Policy, and Michael R. Strain of the American Enterprise Institute.
In summary: In mid-2021, 26 states opted to prematurely end at least one of the expanded, pandemic-era unemployment benefits programs — the Federal Pandemic Unemployment Compensation (FPUC) and Pandemic Unemployment Assistance (PUA) — which were originally set to expire in September 2021.
This research studied the impact of this premature termination on larger labor market dynamics, including unemployment trends.
Key Takeaways:
- The early exit of expanded FPUC and PUA benefits led to a significant increase — around two-thirds — in the flow of unemployed people into employment among prime-age workers (25 to 54).
- Early termination also correlated with a decrease in state-level unemployment rates and, to a lesser extent, an increase in employment-population ratios.
- The welfare implications of early benefit termination are ambiguous, as it also increased financial stress among households. The share of households reporting “no difficulty meeting expenses” in the previous week dropped by about 4 percent to 5 percent of the average share from four months prior to the benefits’ cessation.
Why the research was done: The COVID-19 pandemic, which increased both unemployment and access to unemployment insurance (UI), presented a unique environment to study the dynamics of unemployment benefits in American households. The FPUC provided an additional $300 per week on top of standard state UI benefits, while the PUA extended benefits to previously ineligible workers, such as self-employed, part-time, and “gig” workers. Amid debates on labor shortages and economic recovery, 21 states prematurely terminated these expanded benefits in 2021.
Hubbard and his co-researchers hoped to examine whether these benefits, which had been expanded since their initial launch during the early days of the pandemic, deterred unemployed individuals from returning to work.
By analyzing the employment transitions of prime-age workers using Current Population Survey (CPS) data and various estimation methods, the study sought to provide empirical evidence on the effects of ending pandemic-era UI programs on employment dynamics and household financial well-being.
How it was done: The researchers turned to CPS data to explore the impact of early termination of pandemic-era UI benefits on employment status and trends. They focused on 21 of the 26 states that opted out of the FPUC and PUA programs before their scheduled end in September 2021.
The researchers employed three methods of data analysis:
- Difference-in-difference analysis, which compared employment changes in states that ended benefits early against those that didn’t, isolating the policy’s impact.
- Triple-difference analysis, which further refined comparisons by accounting for other variables that could influence employment, like economic conditions or state policies.
- Event study estimation, which examined the timing of employment changes around the policy shift to identify immediate and delayed effects.
The three-pronged assessment measured the effects on the flow of unemployed workers into employment, state-level unemployment rates, employment-population ratios, and households’ financial well-being.
What the researchers found: The study found that states that ended pandemic-era UI benefits early saw reductions in overall unemployment rates. Among workers ages 25 to 54, ending pandemic-era UI benefits early led to a significant increase in employment — approximately two-thirds higher than before the policy change.
Researchers also found that when the unemployment benefit programs ended, the number of people working compared to the total population increased, though these results varied in scope and importance.
However, the study also found evidence of decreased financial well-being among households. In reviewing data from the Household Pulse Survey (HPS), administered by the US Census Bureau, researchers found more households reported difficulties meeting expenses in the immediate aftermath of the UI programs’ end.
These findings suggest that the expanded UI benefits had a disincentive effect on employment during the pandemic, but ending the benefits may not have had an overall benefit on family welfare.
Why it matters: This research provides empirical evidence on the impact of pandemic-era unemployment benefits on labor market dynamics, contributing to ongoing policy debates about the role of such benefits in economic recovery and employment motivation.
By demonstrating that the early termination of expanded UI benefits led to increased employment rates, the study offers valuable insights for policymakers considering the balance between providing financial support during crises and encouraging labor market participation. At the same time, it indicates that the welfare benefits of such programs are still ambiguous, since ending the FPUC and PUA programs early led to more households self-reporting challenges in meeting expenses.