A short thread on the emergency $600 per week unemployment insurance payment, more formally known as Federal Pandemic Unemployment Compensation (FPUC) /1

FPUC payments are currently coming to around $18 billion per week, supporting 30 million workers. It's the largest week-to-week federal COVID response program that's still ongoing. /2

The FPUC raises wage replacement rates substantially for eligible workers: around 2/3 of them are now getting more from augmented UI than they did from their prior jobs. This raises the question of whether the FPUC has reduced job finding. /3

It's a difficult question to tackle, since the US has never had wage replacement rates above 100% before, but also because the CARES Act relaxed work search requirements for everyone regardless of how generous their UI benefit is. /4

Nevertheless, I looked at transitions into and out of employment in May and June in the household survey, to see if higher wage replacement rates were generally a drag on job finding. I used the superb Ganong et al (2020) UI benefit calculator to link-in likely benefit rates. /5

That calculator is here: https://github.com/ganong-noel/ui_calculator /6

I looked at both the linear effect of wage replacement rates on job finding and job leaving probabilities in May and June, as well as testing for whether there was a "kink" at 100% specifically. /7

The bottom line was that I found no evidence of any effect on labor market flows from more generous UI in May and June, controlling for other demographic factors. In fact some of the point-estimate coefficients were the "wrong" sign. /8

I tried it a variety of other ways unreported in my analysis too: adding controls for state reopenings and mobility, adding state rather than Census division fixed effects, doing the analysis as a panel with individual fixed effects. Nothing was statistically significant. /9

This doesn't mean that the FPUC wouldn't be binding in all states of the world. If the economy were at full employment, if there were no pandemic, and if the FPUC were a permanent rather than a temporary component of the UI system, I'd expect an effect. /10

But the results suggest that the FPUC isn't remotely binding right now at the micro level. Given the macro support to the economy from the FPUC and the growing uncertainty over the economic & COVID outlook, I lean more and more that UI generosity should be maintained. /11

Full expiration would mean an economy that is 2% smaller by the end of 2020, and with 1.7 million fewer jobs, than if the FPUC were extended. /12

Even a partial compromise -- $300 per week for the rest of the year -- would still be an economy 1% smaller by year-end with 800,000 fewer jobs. /13

And those are just aggregate figures. At the individual level, workers would be devastated if the FPUC expired. Almost overnight, their incomes would be cut in half. In states like Arizona, Louisiana, and Mississippi, the typical worker would lose 75% of her benefits. /14

And in states with large populations of unemployed -- states like Nevada that are heavily dependent on industries like tourism -- losing the FPUC would be equivalent to losing a tenth of *all* state personal income. /15

This analysis honestly shifted my thinking. I'm still open to the theory that high wage replacement rates could be binding in the future. But I'm much less concerned about that in the near-term than I was, and more convinced that giving up generosity this year is unwise. /FIN