Consumption Effects of Unemployment Insurance during the Covid-19 Pandemic

Abstract

During the Covid-19 pandemic, unemployment insurance (UI) benefits have taken on an unprecedented role in the United States economy. In May 2020, total UI benefits were equal to 14.6 percent of total wages, more than five times the Great Recession peak. This is due to two factors: first, the high unemployment rate, which reached 14.7 percent in April 2020; and second, the expansion of UI benefits, including a $600 per week federal supplement paid to all benefit recipients. In this paper, we examine the effects of UI on consumption during the pandemic. Our first finding is that during the pandemic, while aggregate spending of the employed was down by 10 percent, the spending of unemployment benefit recipients increased by 10 percent, a pattern which is likely explained by the $600 supplement. Our second finding is that among the unemployed who experience a delay in receiving benefits, spending falls by 20 percent—a drop not seen by those who receive benefits more immediately after job loss. These findings suggest that allowing the $600 supplement to expire without any replacement could meaningfully reduce aggregate consumption.