Lessons from expanded unemployment insurance during COVID-19

The COVID-19 recession was born out of a public health threat. Thus, Unemployment Insurance (UI) was supposed to insure people against income losses associated not only with involuntary job loss, as in a typical recession, but also with the choice not to work because of the risk of public health. Job losses have been dramatic and concentrated in the lowest-paying in-person service sectors such as restaurants, recreation and hospitality, and retail. Unemployment insurance was just one of many policies that provided direct assistance to households, including three rounds of economic impact payments, debt forbearance, child tax credit prepayment and rent relief.

Before the pandemic, regular unemployment insurance replaced only 50% of earnings in most states and, as evidenced by low benefit rates, many unemployed workers were not receiving unemployment insurance benefits. In response to the COVID-19 pandemic, the U.S. government implemented the largest expansion of federal unemployment insurance benefits in U.S. history. It increased the level of benefits through weekly supplements. Eligibility has been expanded to include the self-employed and those unable to work for various COVID-related reasons through the Pandemic Unemployment Assistance (PUA) program. The duration of federal benefits has been extended by 53 weeks.

Evidence on the economic policy response to COVID-19

What happened when the United States gave more money to more people, for longer? Unemployment insurance coverage increased, reaching workers who had always been excluded from the unemployment insurance system and increasing the expenses of all unemployment insurance recipients. But there were relatively smaller efficiency losses, in the form of work disincentives and unemployment insurance overpayments.

  • Unemployment insurance expansions were very gradual in that they offset income losses and provided the most benefits to low-income workers.
  • The impact of unemployment insurance on expenditures was significant. Unemployment insurance benefits have given the macroeconomy a strong boost by boosting consumption, especially among low-income, low-cash workers.
  • The work disincentive effects of unemployment insurance benefits were weak during the pandemic, especially by historical standards.
  • Through the PUA program, Congress increased access to benefits and loss of insured income for workers on the margins of the labor market without clear evidence of greater disincentive effects on work.
  • The rapidly expanding unemployment insurance programs faced a series of administrative challenges to meet the increased demand for benefits, including delays, unnecessary paperwork and overpayments, all of which were costly in terms of consumer welfare and government spending.

Lessons from expanded unemployment insurance during COVID-19

Unemployment insurance benefit extensions covered the risk of labor income not insured by regular unemployment insurance, justifying consideration of adopting them on a more permanent basis or as automatic countercyclical stabilizers.

Temporary countercyclical supplements to unemployment insurance might be appropriate, especially during recessions when the risk of long-term unemployment is high. Although fixed-amount supplements are highly progressive, flexible supplements that target a replacement rate are likely to create fewer inefficiencies in terms of work disincentives.

Unemployment insurance benefits have given the macroeconomy a strong boost by boosting consumption, especially among low-income, low-cash workers.

One of the major challenges states have faced during the pandemic has been establishing an entirely new program amid a spike in claims volume. Thus, maintaining a permanent version of the AUP has the significant benefit of allowing states time to establish protocols and improve systems to accommodate other populations of uncovered workers during off-peak hours.

Stronger administrative systems are needed to deliver accurate and timely unemployment insurance benefits at scale, worker-centric and recession-ready. Since unemployment insurance plays a key fiscal stimulus role in mitigating a recession, its ability to provide quick relief is essential. And yet, states faced delays in processing the huge surge in unemployment insurance claims and implementing the new PUA program. In response, many states have relaxed third-party verification, leading to an increase in abusive payments.

However, flexible supplements require a stronger IT and administrative back-end; IT and administrative shortcomings have been a major obstacle to implementing such a policy during the pandemic. Investment in technology can push the boundaries of what is possible, allowing states to be more precise in making payments at a given speed or to make payments faster while maintaining accuracy. The federal government could provide technology and data infrastructure that could enable not only flexible benefit levels set at a target income replacement rate, but also stronger and more robust eligibility verification and fraud prevention. transparent.

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about the authors

Peter Ganong

Peter Ganong

Assistant Professor of Public Policy – University of Chicago Harris School

Fiona Greig

Fiona Greig

Managing Director and Co-Chair – JPMorgan Chase Institute

Pascal Noel

Pascal Noel

Assistant Professor of Finance – University of Chicago Booth School of Business

Joseph Vavra

Joseph Vavra

Professor of Economics – University of Chicago Booth School of Business

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