A new Economic Policy Institute report shows that the U.S. unemployment insurance (UI) system has historically underperformed as a macroeconomic stabilizer during economic downturns, due to short duration, low generosity, and limited eligibility. In addition, UI benefits fail to automatically ramp up sufficiently during downturns and benefit extensions are not reliably sustained through periods of economic weakness. Instead, their durability relies on the political whims of Congress.
The large but temporary UI expansions enacted by Congress during the COVID-19 pandemic show the UI system’s fuller potential. With these expansions, UI benefits as a share of wage and salary income provided an economic boost roughly four times as great during the pandemic than during any previous recession. The lessons from the UI reforms taken in response to the COVID-19 pandemic show the potential of permanently expanded UI as a significant macroeconomic stabilizer.
“The lessons of the COVID-19 pandemic tell us that unemployment insurance can provide a significant stabilizing role for the economy, and it has the potential to do so again in future downturns,” says Josh Bivens, EPI director of research and co-author of the report. “If these expansions were set on autopilot during every downturn, then future recessions would be shorter and less painful, and recoveries would come more quickly.”
Expanded UI produced a dramatically larger boost to personal income both during and immediately after the COVID-19 crisis compared with prior recessions. For example, UI as a share of total wage and salary income reached 13% in 2020, compared with just 2.5% in the aftermath of the Great Recession in 2010. At its peak, the Pandemic Unemployment Assistance (PUA) program, which extended eligibility to workers who previously could not receive UI, covered nearly 15 million workers who accounted for half of all UI claimants.
To make UI a more powerful macroeconomic stabilizer, reforms should be enacted along three key margins: expanding eligibility to more workers, extending the potential number of weeks that eligible workers could claim benefits, and increasing benefit levels.
“The unemployment insurance system has historically been one of the first lines of response to a downturn, providing immediate financial relief to households whose spending helps stabilize the economy by boosting household spending. However, weaknesses in the UI system have historically limited its effectiveness relative to its potential,” says Asha Banerjee, economic analyst at EPI and co-author of the report. “Expanded benefits eligibility, duration, and levels contributed to stabilizing the pandemic economy—and these expansions should be made permanent and automatic during future economic downturns.”