MNI INTERVIEW: Job Benefits End At Worst Possible Time- SF Fed

The U.S. may see a wave of bankruptcies if two jobless benefits are allowed to lapse next month, a move that will also bring few discouraged workers back into the labor market, San Francisco Federal Reserve researcher Nicolas Petrosky-Nadeau told MNI.

"This is coming at pretty much the worst possible time in terms of support for the economy," he said in an interview. "We're in the middle of the worst labor market that we've seen in our lifetimes and businesses are already very fragile."

Residential real estate is one sector likely to suffer a blow from the expiration of these programs, Petrosky-Nadeau, vice president of macroeconomic research at the Fed bank, said, as cash-strapped recipients face difficulties paying rent and utilities. Unemployed workers benefiting from these programs are also likely to default on a variety of consumer loans.

"Those ripple effects may be more significant for the overall economy than just the direct end to the unemployment insurance payments." he said.

13 MILLION WITHOUT BENEFITS

The Pandemic Unemployment Assistance program, which expands eligibility to independent contractors, and the Pandemic Emergency Unemployment Compensation program, extending benefits by 13 weeks, are set to expire at the end of December and would leave 13 million Americans without benefits.

Fed officials including Chair Jerome Powell have urged Congress to deliver more fiscal aid, saying the recovery will be a long one and cash delivered earlier this year was vital in keeping people afloat. Republican senators have agreed that more is needed in coming weeks but limited their offer to around USD500 billion, a fraction of what House Democrats have sought, and experts have told MNI those senators have little reason to budge given the election results.

Unemployed workers who suddenly find themselves without a steady income are unlikely to flood the labor market looking for new work, Petrosky-Nadeau said. Congress allowed another USD600 a week jobless benefit to lapse after July, and the surge in job seekers that some expected never materialized.

"The opposite happened, and we saw a slowdown in the labor market precisely at the moment the UI generosity expired," Petrosky-Nadeau said. The extra money was likely supporting local businesses by allowing consumer spending to remain at close-to-normal levels, underpinning a wave of rehiring.

"Now the same is probably true for the expiration of the PUA and the emergency extension," he said. "We'll possibly see the exact same situation."

RIPPLE EFFECTS

"The question is whether the people who lost the extension will keep actively looking for work or whether they'll feel sufficiently discouraged that they'll report to the BLS that they're not actively looking," he added. "And if that happens what you'll see is people leaving the labor force."

The labor force participation rate essentially stalled after July when other jobless benefits expired, moving from 61.4% that month to 61.7% in October.

Roughly 4 million Americans in October were not included in the Bureau of Labor Statistics' monthly unemployment rate because they were not actively searching for a job, largely because of a resurgence of Covid-19.

The average U.S. worker earns roughly USD800 per week, Petrosky-Nadeau said, but unemployed workers receiving PUA and PEUC benefits are making closer to USD500 a week. Regular state unemployment programs typically replace about 50% of weekly earnings, usually between USD350 and USD400 per week.

"It's not huge amounts of money," Petrosky-Nadeau said. "But what's probably more impactful are the ripple effects of removing that income."