End of Unemployment Benefits to Have Ripple Effect

The question is how big it will be

Businesswoman carrying cardboard box in office
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When federal emergency unemployment programs end Monday, it won’t just mean millions of families losing income. The U.S. economy will feel the loss of billions of dollars that were going into—and then out of—consumers’ pockets.

Key Takeaways

  • When federal unemployment programs end Monday, millions of workers will be cut off from benefits.
  • The expiration of benefits has a ripple effect. Not only does it impact families, but the loss of billions of dollars per week will impact the broader economy and consumer spending patterns, economists say. 
  • The cutoff may have the most severe impact on regions with high joblessness, though the newly expanded child tax credit may cushion the blow, economists say.  

Estimates on how much money will be removed from total household income vary, with some economists saying it will be $4.2 billion weekly, at least initially. The cutoff is bound to hit some people more than others in an economy where employment levels are growing, but were still 5.7 million jobs short of pre-pandemic levels as of July.

“There are millions of people unemployed right now and relying on that income,” said Shannon Seery, an economist at Wells Fargo Securities. “Depending on how quickly we see those people getting back into the labor market and beginning to collect wages, we could see some effects of that in terms of consumer spending and broader economic impact.”

The federal programs, triggered by the pandemic, have become increasingly controversial as record job openings this year fueled concern the extra help was discouraging people from returning to work. (New research shows people won’t be returning to the workforce in droves once the payments end, but it will help a little.) But the broader economic impact is another factor to consider. The programs, combined with stimulus payments and other financial support from the government, have been propping up consumer spending.

What May Cushion the Blow

Unemployment benefits added about $32 billion to the $1.7 trillion in total income in July, and that will drop to $3 billion in September, Seery estimates. Fortunately, increasing wages, signing bonuses and other incentives should cushion the blow, as will a relatively new form of government assistance—the new monthly child tax credit payments, which she said could make up for $15 billion of the lost income. 

The federal programs offered unemployment benefits to more people (including gig workers and the self-employed) and for longer periods than had been allowed before COVID-19. They also added a flat $300 a week to regular state-administered benefits.

The Monday cutoff affects people in states where the state government hasn’t already withdrawn from the federal programs. Individual states have the option to extend at least some parts of the program, but none had done so as of last week, Business Insider reported, citing inquiries by the publication to all 50 state governments. (The states reportedly said they had no such plans or didn’t respond.)

Estimates on how many people will be completely cut off from benefits range from 7.5 million to 8.9 million, while as many as 2.1 million will continue collecting state benefits but will lose the $300 supplement.

High Unemployment Areas

“As cut-offs spread from mostly smaller states to larger states across the country, we can expect to see a similar, yet more sizable, pattern take hold whereby the majority of unemployed workers struggle to find new jobs and consumer spending falls precipitously,” said Andrew Stettner, a senior fellow and unemployment expert at the progressive think tank Century Foundation, in a commentary Thursday. “Many sectors and high unemployment regions simply have not recovered to the point of being able to absorb all the workers who are about to lose aid.”

Lower-income families, who are more likely to be collecting unemployment benefits, are more likely to curtail their spending after the benefits are cut off, at least until they can find jobs, Seery said. But higher-income households account for the vast majority of consumer spending, she said, limiting the damage to the overall economy.

Still, even if rising employment and elevated savings levels help buffer the shock to the broader economy, low-income families and minorities will be disproportionately affected, said Gregory Daco, chief U.S. economist for Oxford Economics, in an email.  

Families who lose unemployment benefits pare back spending significantly, according to a study released last week by economists at Columbia, Harvard, and other universities. The study used bank data to compare spending patterns between unemployed workers in states that cut off benefits early and those where benefits remained intact.

In states where benefits ended early, there was a “large, immediate decline in consumption.” Workers in those states lost an average of $278 a week in unemployment benefits, increased their earnings by just $14 a week on average, and reduced their spending by an average of $145 as of early August, the study found.

Have a question, comment, or story to share? You can reach Diccon at dhyatt@thebalance.com.