Research US: Not extending higher unemployment benefits would lead to a significant negative income shock

Key takeaways

• Temporarily higher unemployment benefits (an additional USD600 a week) are set to expire by the end of month. Negotiations on a new stimulus package have begun this week. 
• In our view, the lack of demand for labour is stronger than people’s incentive not to work despite some anecdotal evidence that it is hard to get people back to work.
• Assuming total claims are 20,000,000 at the end of the month, a decision not to extend the support would remove USD48bn a month from the economy if these people cannot find a job.
• The fiscal multiplier for unemployment benefits is assumed to be high and hence the total economic impact is even larger (cumulative 3.3% decline in GDP all else being equal).
• We expect the next stimulus package to include an extension of the higher benefits but, unfortunately, as of today, it does not look as though the negotiations will conclude before 31 July. However, we expect a reduction in the level of benefit, which could potentially slow the recovery. We cannot rule out the possibility of no extension and if this materialises, we expect a more significant setback in the recovery.

Lack of labour demand

One of the main elements in the US emergency support for American employees was temporary higher unemployment benefit (an additional USD600 a week on top of regular benefits), which is set to expire at the end of this month. The negotiations on the next stimulus package have begun now that Congress has returned from its two-week 4 July recess. In this document, we take a closer look at the temporary higher unemployment benefit and what it would mean from an economic perspective if Congress did not extend it.

In May, unemployment benefits accounted for 6.4% of total income and without the higher unemployment benefits, the current crisis would have led to a significant negative income shock for many people.

One uncertainty is whether the attractive higher unemployment benefit of USD600 a week makes Americans unwilling to find a job or whether many people are receiving unemployment benefits because of a lack of labour demand. Looking at recent data, there were four unemployed people per job opening in May, which, although not as high as at the peak of the financial crisis, suggests to us that lack of demand is the dominant effect here. Job openings in retail, leisure and hospitality, transportation and manufacturing remain subdued. Construction has recovered due to the V-shaped recovery in the housing market but construction accounts for a smaller share of total employment.

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