Tuesday , March 19 2024
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The UI fiscal stimulus

Summary:
Apropos my previous post, a new NBER paper by Casado et al estimates the effect of pandemic unemployment benefits on local spending: The FPUC supplement to unemployment insurance of 0 ended at the end of July 2020. Prior to its expiration, the average weekly benefit paid was 2, which would fall to 7, implying a decline in the replacement rate of 68%. The replacement rate was roughly 1.25 in the latest data, so the new replacement rate would be roughly .4, all else equal. At the unemployment rate of .077 in the latest data, spending this reduction in benefits would lead to a decline in spending of 44%. If the FPUC supplement is reduced to 0, the replacement rate would fall by 44%. The implied reduction in spending from these benefits would be

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Apropos my previous post, a new NBER paper by Casado et al estimates the effect of pandemic unemployment benefits on local spending:

The FPUC supplement to unemployment insurance of $600 ended at the end of July 2020. Prior to its expiration, the average weekly benefit paid was $812, which would fall to $257, implying a decline in the replacement rate of 68%. The replacement rate was roughly 1.25 in the latest data, so the new replacement rate would be roughly .4, all else equal. At the unemployment rate of .077 in the latest data, spending this reduction in benefits would lead to a decline in spending of 44%. If the FPUC supplement is reduced to $200, the replacement rate would fall by 44%. The implied reduction in spending from these benefits would be 28%. Even if the FPUC supplement is reduced to $400, the replacement rate would fall by 19% and spending would fall by 12%. Thus, substantial declines in the generosity of UI benefits are predicted to have dramatic adverse effects on local spending.

Sure, you can question the results, and wonder about the size of multipliers, but this could be a disaster and the only reasonable policy choice is to extend the UI benefits.

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