Cutting UI Benefits by $400 Per Week Will Significantly Harm U.S. Families, Jobs, and Growth

Last month, we estimated the effect of allowing the $600 supplement to weekly unemployment insurance (UI) benefits to lapse at the end of July, as is currently scheduled. We found that this would strip away enough aggregate demand from the economy to slow growth in gross domestic product (GDP) by 3.7% over the next year. This slower growth would result in 5.1 million fewer jobs created over the next year.

Currently Senate Republicans are offering a proposal to reduce this weekly $600 supplement to closer to $200. This is better than allowing the $600 benefit to go all the way to zero, but this would still lead to GDP that was lower by 2.5% a year from now, and, would lead to 3.4 million fewer jobs created over the next year.

These are huge numbers--but they are driven by the fact that the support this extra $600 has given tens of millions of working families is huge. The economic shock of COVID-19 was enormous, but the large expansions to the UI system included in the CARES Act of March were incredibly effective in blunting the effect of this shock. The only problem with these expansions was that they begin running out next week--while the job market remains fundamentally damaged.

Next week (July 30) will see data on growth in GDP for the second quarter of 2020 released. This data is all but guaranteed to show the largest one-quarter collapse in economic growth in U.S. history. The week after that (on August 7), we will see data on job-growth for the month of July. Early indications strongly signal that we lost jobs in July, reversing the last two months gains--which were already wholly insufficient to declare the labor market healthy enough to begin ramping down the generosity of UI benefits. The big constraint on economic growth right now is the spread of the coronavirus. If we allow the $600 supplement to lapse, another huge constraint on growth will be imposed--collapsing incomes for the tens of millions of U.S. families that had to rely on these benefits in recent months.