US Unemployment Insurance in the Pandemic and Beyond

Unemployment insurance has played a critical role in the US economic response to the coronavirus pandemic. It has been greatly expanded, extended to new people, and become available for a longer period. As a result, as of late June 2020, about 36 million people were receiving or had applied for unemployment benefits. Unemployment insurance has been key to the fact that household disposable personal income has risen even as labor compensation has plummeted, protecting both households and the macroeconomy. The expansion of unemployment insurance ends at the end of July 2020. The need for it remains very high. Eighteen million people are still unemployed, and even though the overall labor market has improved on net, there are still substantial flows into unemployment, with more than 2 million people making initial claims for benefits every week for 16 consecutive weeks ending July 4. At the same time, the economy is evolving from where it was during the lockdown period, and it makes sense for policy to evolve along with economic conditions. The current experience has also highlighted some of the major shortcomings of the unemployment insurance system and the need for permanent reforms to make the system more effective at protecting people and promoting reemployment. This Policy Brief makes eight points: 1 The unemployment crisis is severe. 2 Unemployment insurance has played a critical role in both protecting workers who lost their jobs and supporting the economy as a whole. 3 Unemployment insurance has both positive and negative effects on labor supply; it can improve matching between employers and employees. 4 Jobs are currently constrained primarily by lack of demand by employers, not lack of supply by people interested in and willing to work. 5 Expanded unemployment insurance should continue, with adjustments made as the unemployment rate changes. 6 The abrupt expiration of any form of expanded unemployment insurance at the end of July would create problems both for the workers directly affected and for the economy as a whole, reducing GDP by about 2.5 percent in the second half of 2020—more than a typical year’s worth of economic growth. 7 The unemployment insurance system had major shortcomings before the COVID-19 crisis and should be permanently reformed. 8 Much more is needed to protect jobs, create jobs, and foster economic recovery.