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Op-Ed: National Review: The Beginning of a Nationwide Natural Experiment in Labor Markets

July 1, 2021

By Cale Clingenpeel in National Review | Capital Matters

DEMOCRATS have repeatedly asserted that richly expanded unemployment insurance benefits have nothing to do with the latest disappointing jobs numbers and skyrocketing inflation. They are almost surely about to be proven wrong. Just last week, the Department of Labor released Unemployment Insurance (UI) data that includes the first week in which the $300 federal supplement is no longer available to filers in four states. In the first four states ending the supplement, initial UI claims plunged while claims in the states not ending the supplement early increased.

On May 4, Governor Gianforte of Montana announced that his state would end participation in federal pandemic-related unemployment benefits to confront the growing shortage of willing workers. Since then, 25 additional governors — including one Democrat — announced their intent to follow Montana’s lead. However, each of these governors announced different timetables for actually implementing the termination of supplemental unemployment benefits. The UI data release last week marks the first glimpse into a nationwide natural experiment that will unfold over the course of the summer as roughly half the states sees the federal UI supplement phase out earlier than legislated with the other half continuing to provide the supplement through the legislated end date in early September.

The coalition of 26 governors taking action on the UI front comes at a critical moment. April and May marked two consecutive months in which employment gains fell far below expectations amidst rising demand and a return to pre-pandemic levels of economic activity. The message from employers is overwhelmingly that they stand ready to hire and fill a record number of openings, but to do so requires applicants willing and qualified to work. At the core of this divide between employers’ demand for workers and the supply of willing applicants is the federal government’s $300 per week supplement to regularly provide state unemployment benefits. Recent analysis finds that in many states, the enhanced unemployment benefits can easily exceed typical median incomes for households.

No longer able to receive the federal supplement and reverting to the pre-pandemic generosity of unemployment benefits, many workers may face a more compelling incentive to return to the workforce and fill the deluge of job openings rather than apply for UI. Alaska, Iowa, Mississippi, and Missouri are the first batch of states where the $300 per week federal supplement expired on June 12. One week after the expiration, in the week ending on June 19, total initial UI claims across those four states plunged by 28 percent. In the 22 other states that have announced but not yet implemented an early end to the federal supplement, initial clams fell by roughly 11 percent. By contrast, in the same week, among the 24 states and the District of Columbia that so far intend to keep the $300 per week supplement in place until September, initial claims actually edged up by 1 percent.

Although these early state claims data are subject to substantial revision — and one week certainly does not make for scientific proof — the magnitude of the changes in this first glimpse of the UI data signal state-by-state patterns that will become more clear as the summer proceeds and more data become available, and more damning for those — that would be the Democrats and President Biden — unwilling to face up to the implications of these data. Furthermore, in anticipation of the phase out of the $300 per week supplement, some workers may forgo applying for UI earlier than the week of the expiration. In the earliest-moving group of four states — since the first governors began making announcements in early May — initial claims for UI have been cut in half. The decrease in those four is roughly six times the decrease in the 24 states and the District of Columbia that have announced no such early phase out.

While a nationwide natural experiment in ending the provision of supplemental unemployment benefits may excite the academic class with no shortage of future research papers to pursue, the consequences for the American worker are real and immediate. Negative duration dependence — the decreasing likelihood of finding future employment as the amount of time an individual is jobless increases — and the lessons of the scarring effects of long-term unemployment in the aftermath of the Great Recession mean time is of the essence. Every month, and indeed every week, counts in ending the costly and damaging incentives that keep Americans from returning to the workforce. Meanwhile, businesses suffer financial losses as they contend with worker shortages. While the White House continues to blame childcare concerns as the principal cause of the worker shortage — despite the research to the contrary — millions of Americans face dimming prospects of future employment and economic self-sufficiency.

Cale Clingenpeel serves as Chief Economist for the America First Policy Institute (AFPI).