No proof the unemployed are sensitive to unemployment compensation?

Is questioning whether unemployed Americans respond to the availability of unemployment compensation just another way of insulting their intelligence? If one can make more money being paid to stay at home, a rational person should do that, mindful of any effect on future employability, of course. Do we really need proof of the obvious? To be sure, it is a bit cynical to frame this as “being paid to stay home,” but that’s what it is — or more neutrally, compensation for being unemployed, which one will lose by taking a job. 

The proof lies in the experience of the past year.

We have run this experiment since March 14, 2020, when initial and continuing claims for unemployment compensation skyrocketed as the economy shut down because of the COVID-19 pandemic. Effective March 27, with the signing of the CARES Act, and paid retroactively for pandemic-related unemployment, workers received federal compensation in addition to regular state unemployment compensation if they are eligible. Initially, the federal payment was $600 per week, payable through July 31, 2020. 

Continuing claims for compensation rose from 251,416 people in the week ending March 14, 2020, to a peak of 22. 8 million continuing claims in the week ending May 9. Over the next two weeks, there was a massive reduction of 3.7 million as people returned to work or exited from unemployment rolls. These two weeks are omitted from the data because the federal payment did not change and the decline in unemployment was associated with sorting out the initial chaos as to whether one’s employer would choose to remain shut down or was required to do so in response to the pandemic.

From this initial episode on, there were four distinct periods of relatively smooth decline in unemployment claims. The periods differ by having greater or lesser amounts of federal compensation because of breaks in the amount paid.

In the first period, the federal payment was $600 per week until July 31, 2020. The average number receiving regular unemployment compensation declined by 362,903 people per week from May 23 to July 25, the last week for which the unemployed received the federal supplement of $600 per week.

Since the federal compensation program was due to end and no extension was in sight, the average weekly reduction surged to 526,263 people per week in the second period, July 25 to Sept. 19. A loss of 50 percent of the payment, and the prospect that it could end if Congress failed to act, increased the pace of those exiting unemployment by 45 percent over those eight weeks. Two key issues influenced this — first, an expected reduction in weekly compensation to $300 was the most expected outcome of any extension and second, when it did not obtain congressional support, former President Trump actually found money to maintain a $300 weekly payment for a few more weeks from the executive branch budget. In part, the Trump payment reflected a late July congressional debate between those wishing to extend the $600 weekly and those wanting to extend the payments at a lower $300 weekly. 

The dispute was resolved by letting the congressionally authorized payment end, as anticipated in the CARES Act, rather than accept a reduction to the $300 level. Both the temporary Trump extension of payments and the complete elimination of the federal supplemental compensation were unexpected — and the Trump payments, when they were created, were not expected to last more than three to six weeks — so the unemployed were incentivized to search harder. This period can be thought of as an uncertain $300 weekly period that had a huge surge in the pace at which people left continuing claims for unemployment compensation.

The third period began the week ending Sept. 19, 2020, and ran through Nov. 7. At the beginning of this period, the Trump temporary $300 weekly payment ended, leaving no federal assistance to the unemployed. Over these seven weeks, the weekly pace of exit surged to 791,821, as the actual weekly federal payment fell to zero. This led to a 50 percent rise in the pace of exiting unemployment. This period can be thought as a zero federal payment episode with the most rapid pace of reduction in those claiming unemployment. 

The fourth period ran from the week ending Nov. 7 to the week ending May 1, 2021. Over this interval, no federal payment was forthcoming until the Consolidated Appropriations Act was passed and signed at the end of December, reestablishing the $300 weekly federal unemployment compensation to mid-March, 2021. The American Rescue Plan further extended $300 weekly pandemic-related federal compensation programs to Sept. 6, 2021, though in recent weeks several states have announced early ends to these payments in May and June.  

Besides restoring the federal payment to the $300 weekly level during this period, there was the largest surge of COVID-19 cases for the year from mid-October 2020 through mid-January 2021, causing new restrictions and keeping the unemployed from seeking and finding work at the previous rapid pace. As a result, during this final period, the average decline in continuing claims for unemployment fell to a weekly rate of 94,803. As more states actually drop the federal payment in the near future, exits from unemployment and continuing claims are likely to accelerate, especially given that the economy is set to open up entirely. This period began as a zero-payment period then returned to a $300 weekly payment regime. The pace of exit from unemployment slowed, not surprisingly. 

It should not be taken as an insult to potential workers that most policy analysts expect rational people to prefer to stay home from work for a period when they can earn more than they would by returning to a job. It is not a comment on their work ethic or responsibility to their family, friends or community. Most people respond to incentives, and when they could receive much more, or even slightly less, for an extended period at home and avoid contact with an infectious virus, that was the short-term responsible thing to do.  

John A. Tatom is a fellow at the Institute for Applied Economics, Global Health and the Study of Business Enterprise at Johns Hopkins University, and a former research official at the Federal Reserve Bank of St. Louis.