Job Loss and the Safety Net

By and ·December 2, 2020
University of Colorado Denver and University of Connecticut

The Issue:

Job loss is a common phenomenon in the United States labor market and leads to large and persistent losses in earnings for displaced workers. The U.S. has a patchwork of safety net programs intended to help insure workers against this loss. These include the Unemployment Insurance program (UI), which helps those who lose their jobs as well as other programs that are more directly targeted towards lower-income people regardless of job loss. Unemployment insurance is by far the most important program for workers who lose their jobs. However due to the structure of the program, the benefits paid out tend to be relatively more generous for higher income workers. The CARES Act expanded UI temporarily, but as these expansions expire, many workers will be left with little public safety net benefits, even as they continue to face great material hardship.

Unemployment insurance is the most important support for displaced workers. However, benefits quickly decline over time and are more generous for higher income workers.

The Facts:

  • In any given year in the U.S., 1.5% of all workers are laid off. During recessions, this number is much higher, and in the spring of 2020, COVID-19 caused an estimated 22 million job losses (13% of the total workforce). A large literature in Economics documents that in the first year after job loss, workers earnings typically fall by 16-66% and stay significantly below pre-job-loss earnings for many years after displacement. And, before COVID-19, more than half of U.S. workers didn’t have savings to cover at least 3 months of living expenses.
  • In the U.S., the main federal safety net program designed to aid displaced workers is Unemployment Insurance (UI). UI provides cash benefits for displaced workers for around 26 weeks, and for longer in recessions. States set the specifics of UI benefits, but they are always an increasing function of pre-job-loss earnings up until a state-specific cap. We tracked the income of displaced workers between 1996-2013 with at least 1 year of job tenure for two years following their job loss using the Survey of Income and Program Participation. After unemployment insurance, Supplemental Nutrition Assistance Program (SNAP) is the most commonly used program, followed by Free and Reduced Price Lunch (FRPL) — but their support is minimal in comparison to unemployment benefits (see chart). This is in part due to stricter eligibility rules, and in part to smaller benefit amounts: displaced workers who received SNAP were paid $400 per month, compared to $1468 per month among UI recipients. Additionally, an even smaller subset of workers turn to social insurance programs targeted to adults with disabilities: Supplemental Security Income (SSI) and Social Security (SS) benefits. 
  • The value of unemployment insurance benefits quickly declines over time due to time limits on program receipt. We find that, on average, over 1996-2013, these workers received $623 (in 2020 USD) from UI in the months immediately following job loss, making up 20% of lost earnings (see here). However, one year after the job loss, workers only receive $197 per month, even though monthly earnings still remain $1900 below pre-job-loss earnings after one year. 
  • Unemployment insurance typically provides larger benefits to higher earners, and conditions eligibility on minimum earnings and work history, leading it to be a regressive program in practice. Between 1996-2013, workers who lost their jobs and were in the lowest quintile of pre-job loss earnings received on average $290 from federal safety net benefits in the two years following job loss (the equivalent of 22% of their lost earnings), compared to $754 for workers in the 4th quintile — 29% of their lost earnings (see chart). 
  • The CARES Act expansions to unemployment insurance to address the fallout from the coronavirus pandemic were more progressive. The CARES Act increased UI-recipients’ weekly benefits by $600 with the Pandemic Unemployment Compensation program. Because the benefit increase was the same for everyone, it was more progressive than the traditional UI program, however this benefit expired on July 31, 2020. Additionally, the CARES Act expanded eligibility to groups not traditionally covered by UI through Pandemic Unemployment Assistance (e.g. gig workers), which also improves the progressivity of UI, but is set to expire at the end of 2020. Finally, the CARES Act extended benefit duration by 13 weeks. Providing aid to individuals through the pre-existing UI system was one way of quickly getting cash in consumers’ pockets to boost consumer demand. However, the UI system was quickly overwhelmed trying to process the large number of payments, which led to delays in benefit receipt, an issue that must be addressed going forward. The CARES Act also expanded SNAP benefits and created the Pandemic-EBT program to replace lost school meals due to school closures. These programs aided needy families, however, the magnitude of these increases was small relative to the UI increases. 
  • Greater unemployment insurance benefits may reduce a worker's incentive to look for a new job, however, evidence suggests this effect is smaller during recessions. Having access to more generous unemployment benefits could reduce some of the urgency for finding an alternate source of income (this can also allow workers to be more selective in accepting their next job, rather than taking up the first opportunity that comes along). But during periods of high unemployment, when job openings are scarce, laid off workers face greater pressure to seek out new employment. And recent findings indicate that the CARES Act benefit increase to unemployment insurance did not have a substantial impact on work search effort. Moreover, past evidence shows that the benefit that unemployment insurance provides to workers and their families by allowing them to maintain their level of consumption of food and other necessities is larger during recessions and was important during the first few months of COVID. This helped to stabilize spending, especially for low-income households, and in the process this sustained overall demand in the economy. 
  • Failure to pass more economic relief is leaving families and states hurting. Many families are still in great material hardship — in early November 2020, 26 million adults reported food insecurity (12% of all adults, compared to 3.7% in 2019). Moreover, states now face tough decisions to balance supporting families economically by keeping the economy open due to lack of federal aid, and protecting the health of their populations. This is particularly worrisome since states are limited in the relief aid they can implement on their own due to balanced budget requirements.

What this Means:

The CARES Act expansions to unemployment insurance provided much needed benefits to displaced workers in 2020 due to COVID-19 and helped counteract the regressive nature of the unemployment insurance program. UI likely reduced hardship for families and helped to boost consumer spending. However, given the temporary nature of these expansions, and the stalling of more, comprehensive federal relief, the U.S. is likely to see increased hardship in the coming months, both in terms of consumers’ pockets, and states’ decisions. COVID-19 has highlighted the lack of widespread automatic stabilizers in the U.S., which may be crucial to mitigate the harm due to the recession by boosting consumer demand. As our work shows, programs like SNAP only modestly act as stabilizers given that their stricter eligibility rules and less generous benefits limit the extent to which they can expand during downturns. Unemployment insurance acts as a buffer for lost income, but it benefits the highest socio-economic status households the most without the CARES Act extensions. As it is, the U.S. relies largely on aid programs passed only in response to recessions that are subject to political will and climate, and rely on outdated systems to process benefit payments.


Employment / Safety Net / Unemployment Insurance
Written by The EconoFact Network. To contact with any questions or comments, please email [email protected].
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