Expanded Unemployment Insurance May Lessen Impact of Layoffs

March 31, 2020

Economic implications brought on by the coronavirus (COVID-19) pandemic are increasingly visible for workers, with layoffs in industries like retail and hospitality being reported. On Wednesday, March 18, President Trump signed into law a coronavirus aid package that was passed through the Senate earlier the same day. Among other provisions, this second round of emergency measures will expand funding to states for unemployment benefits.

JPMorgan Chase Institute Take:

With prolonged disruptions to labor demand, a rise in unemployment could well be accompanied by unemployment that lasts for an extended period. Research by the JPMC Institute shows that unemployment insurance (UI) benefits are crucial in preventing workers who have lost a job involuntarily from experiencing steep declines in consumption. UI substantially softens the drop in family income due to job loss — from a 46 percent drop in monthly income to a 16 percent drop. As a result of this boost from UI, initially, spending drops by just 5 percent upon job loss. But those who are unemployed longer-term and exhaust their benefits (typically after six months) exhibit steep declines in consumption, including on basic necessities such as grocery and healthcare spending.

Measures included in the federal aid package which would extend the duration of benefits and encourage states to ease eligibility requirements are a good steps for vulnerable families. It warrants attention that only about one in four unemployed workers receive UI benefits, which is an all-time low. Expanding UI eligibility to more types of workers, such as those who are self-employed or independent contractors, would be an additional explicit way to help those affected by the current pandemic. Our data suggest that welfare gains from extending the duration of benefits are four times as large as from raising the level of UI benefits in a budget-neutral policy comparison. In other words, families may be better off if they can maintain a constant level of consumption for eight months of UI, rather than consume more in six months of more generous UI and less in the last two months.

Read more of the Institute's research here