What happens to the US job market when enhanced Covid unemployment benefits expire?

Ending enhanced unemployment benefits may not be ‘silver bullet’ to solve labour shortages

A labour shortage across the US has seen companies boost incentives and pay to attract workers (Getty Images)

One of the reasons given for the current tightness of the US labour market is that people have been choosing not to take jobs due to supposedly generous unemployment benefits rolled out as part of the pandemic response.

Since March, the US government has been providing an additional $300 per week to the unemployed to help cope with the economic impact of Covid-19.

These benefits are set to expire in September, raising the question as to whether this will go some way to solving the shortage of workers that has been plaguing some parts of the economy – and in many cases driving up wages. In short, will people be forced back to work?

Two-fifths of states opted to end enhanced benefits earlier this summer, based on the argument that they were a major cause for the labour squeeze. This provided 20 case studies to show whether people did reenter the job market.

Payroll and HR services provider Gusto examined data from its platform to help answer the question as to whether ending these benefits boosted hiring.

The data shows that aggregate employment in service-sector businesses is little different across states that opted to end benefits early compared to those who have not.

States that ended enhanced provisions early have seen an increase in employment of adult workers 25 or older. This began in the week that governors announced enhanced unemployment insurance would soon end.

This trend was particularly driven by the states in this group with the highest vaccination rates – Alaska, Iowa, New Hampshire, North Dakota, West Virginia, and Wyoming.

Health concerns appear to be playing a key role in driving adults’ labour supply decisions rather than unemployment payments alone.

In states where enhanced unemployment insurance will not end until September, there has been a simultaneous spike in the hiring of 15 to 19-year-olds.

This suggests that, while enhanced unemployment support during the pandemic has impacted the composition of the current labor market, it has not slowed down aggregate employment.

The jump in teen hiring in states that kept enhanced payments appears to show that when employers couldn’t find adults to hire, they brought in younger workers with less experience. Teenagers were not likely to qualify for unemployment.

Older adults also may not have returned to work, not just because of health concerns, but ongoing disruption to childcare and education arrangements.

Overall, employment growth in states that ended the supplemental payments in June has been on par with those ending benefits in September.

Cumulative headcount has risen 11.6 per cent since the start of April 2021 in states that have ended these provisions, compared to 11.2 per cent growth in non-ending states, Gusto reports.

Luke Pardue, economist at Gusto, notes that ending enhanced unemployment is therefore not a “silver bullet” to speeding up the economic recovery, but rather just one factor in a person’s decision-making process when it comes to returning to work.

“Policymakers would be better-served by focusing on achieving higher vaccination rates and ensuring schools and child care centers can re-open in a safe and timely manner,” he writes, adding that this is particularly urgent with the looming deadline for all states coming in several weeks.