Slashing extra federal unemployment benefits to $200 per week would lead to a 28% drop in consumer spending, study finds
- If extra federal unemployment insurance is cut to $200 per week, consumer spending will slump 28%, according to a study released Monday from the National Bureau of Economic Research.
- Consumer spending would drop 12% if the extra unemployment benefit is slashed to $400 per week, the study found.
- The study comes as Congress discusses restarting debate of the next round of coronavirus stimulus. While Democrats have pushed to extend the additional $600 weekly UI benefit, Republicans have proposed cutting it.
Cutting the extra federal unemployment insurance amid the coronavirus pandemic will lower consumer spending, according to a study released Monday by the National Bureau of Economic Research.
If extra federal unemployment insurance is cut to $200 per week, it will reduce the wage replacement rate by 44% and lead to a 28% drop in consumer spending, according to the paper, titled "The Effect of Fiscal Stimulus: Evidence From COVID-19."
Even a cut to $400 in extra weekly unemployment insurance would lower the wage replacement rate by 29%, and lead to a 12% fall in consumer spending, the study found.
"We find that higher replacement rates lead to significantly more consumer spending – even with increases in the unemployment rate – consistent with the goal of the fiscal stimulus," authors of the paper wrote.
The study comes amid a debate on the future of the extra federal unemployment insurance benefit. In March, the CARES Act established an additional $600 per week to unemployed Americans, which helped replace wages lost due to the pandemic and boosted the economic recovery from the ensuing recession.
But at the end of July, the benefit expired without a plan in place for what aid is coming next to the roughly 30 million Americans who are still unemployed. When it expired, the average weekly UI benefit fell to about $257 from $812, suggesting a 68% decline in the wage replacement rate, the study found.
Consumer spending is an important part of the economy and recession recovery because it makes up roughly 70% of US gross domestic product. Spending is also related to hiring — the more consumers shop, the more small businesses are able to expand and hire more workers.
The fate of the extra weekly unemployment benefit is up in the air. Last week, Democrats and Republicans failed to come to an agreement on the next round of stimulus, in part because of different ideas on how to extend additional unemployment benefits.
While Democrats have pushed to extend the extra $600 per week, Republicans proposed in the HEALS Act lowering the weekly amount to $200 for two months until states can set up unemployment benefits to replace 70% of workers lost wages.
On Saturday, President Donald Trump signed four executive orders including one that would extend $300 per week in federal unemployment insurance, with states covering another $100 per week. Trump's orders could face legal and other challenges, and experts have said that many states won't be able to cover an additional $100 per week.
While the US economy added back jobs in July and the unemployment rate declined to 10.2%, there are also signs that the recovery is losing steam. Jobs were gained back at a slower pace than in previous months, and consumer sentiment has slipped amid spiking COVID-19 cases.