Since the start of the pandemic in 2020, the Federal government has been extremely involved in the U.S. economy. Stimulus after stimulus has been passed by Congress without much thought about the externalities of such new policies. One of the largest interventions by the government over this time period has been the increased amount of unemployment insurance benefits available to individuals that have lost their jobs.

In early April 2020, most states had begun paying additional unemployment compensation to eligible claimants, funded by the Federal government. An additional $600 was provided to claimants for several months before phasing out in July 2020. On top of this, a new Federal program named Pandemic Unemployment Assistance (PUA) was created to help individuals that were not eligible for unemployment compensation through the regular unemployment insurance system. PUA was much easier to qualify for, but claimants were still eligible for the additional $600 in increased Federal benefits.

After the policy providing an additional $600 in benefits lapsed, a new program was put in place to provide an additional $300. Since January 2021, this has been the case for unemployment insurance.

Variation Among States

While the Federal government has been providing additional flat payments to claimants ($600 and $300), every state is free to choose the amount of benefits paid out to eligible claimants. Just as there is substantial variation among the states in terms of cost of living, so too do benefits vary. However, the Federal government either did not consider this fact or failed to consider the externalities created by this policy. 

Research done by Stephen Slivinski and Paul Bernert at Arizona State University shows how cost of living differs among several cities across the U.S. Their research also shows what percentage of a worker’s personal income is being replaced currently by unemployment insurance benefits and the extra $300 provided by the Federal government. Their data shows that in Bridgeport, Connecticut about 147% of a worker’s wages can be replaced by unemployment compensation. Other cities on their list have strikingly high replacement ratios as well, while others have much less generous ratios.

Externalities Created

These large increases in benefits made available to unemployed workers have created externalities probably not anticipated by Congress. The largest issue probably created by enhanced benefits is labor shortages. While the pandemic and lockdowns enforced by the government certainly did have a large effect on the Labor Force Participation rate (the U.S. average dropped from about 63% to 60%), the sustained decrease since probably can be attributed to enhanced unemployment compensation. Since about 2013, the Labor Force Participation rate has remained relatively constant around 63% in the U.S. However, since the drop off after the start of the Coronavirus Pandemic, the rate has averaged about 61.5%.

When looking at the state level, this affect can be seen even better. In Connecticut where replacement ratios for benefits seem to be the highest in the nation, the Labor Force Participation Rate has suffered even more. After an initial drop at the start of the pandemic from about a 66% participation rate down to 63%, the rate stabilized at about 64%, after the initial enhanced benefits expired. Then, when the enhanced benefits were reinstated at the start of 2021, the participation rate fell sharply again to about 60%, where it has stayed ever since. It would seem that the higher the replacement ratio, the greater the incentive people have to not work and collect unemployment compensation.

Another externality that has been created through the enhanced unemployment benefits is the incentive for fraudsters to target the unemployment insurance program. A report published by the CEO of ID.me, a company that helps states cut down on unemployment insurance fraud, claimed that as much as 50% of all unemployment claims during the pandemic may have been paid out to fraudsters. The historic improper payment rate is about 10%. This would amount to about $400 billion paid out to people that should not have received benefits. To make matters even worse for the Federal government and their new policies, it seems that the new program instituted at the start of the pandemic, Pandemic Unemployment Insurance (PUA), was the main target of fraudsters due to the relaxed eligibility requirements. It is obvious that policy makers did not account for fraud when they created this policy.

Conclusion

It’s obvious that Congress and other policy makers didn’t do their due diligence when they created the various stimulus programs instituted during this pandemic. The amount of negative externalities rival any benefits the new programs created. Much of the labor shortages being experience by employers could have been created by the enhanced unemployment insurance. On top of this, some of the additional benefits have gone to fraudsters, essentially stealing billions of dollars from tax payers, adding to the national debt. Clearly Congress should think twice before creating additional policies like they have during the pandemic.

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