End of Covid-19 unemployment benefits poses test for US recovery

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A big dose of fiscal support for the US economy will be withdrawn this week as more than 7.5m people lose pandemic-era jobless benefits, testing the strength of the economic recovery amid a resurgence of Covid-19.

The expiration of extra federal unemployment payments highlights a shift in America’s policy response to the coronavirus crisis — away from emergency measures to support the labour market in favour of long-term changes to the safety net backed by US President Joe Biden.

But the transition comes at an awkward time for the US economy and the Biden administration, with job growth slowing in August in response to the spike in coronavirus infections tied to the Delta variant, and fears rising of a more protracted slowdown if the pandemic does not abate.

Supporters of the benefits are worried that the withdrawal could also undermine government efforts to create a more equal economic rebound.

“It’s going to slow the recovery, slow demand for jobs, and cut against the goal of creating a high-pressure economy that can bring in more workers,” said Lindsay Owens, executive director of Groundwork Collaborative, a left-leaning economic policy think-tank.

Right now millions of American families are going to lose a lot of income and that takes away a lot of options for them

The unease surrounding the end of the federal jobless benefit top-up, worth $300 per week, comes amid a reversal in sentiment in Washington compared with earlier in the year, when the US economy started rapidly gaining traction, vaccinations picked up, inflation flared, and any appetite to extend the programme diminished rapidly.

Republicans blamed the jobless benefits, which were extended in Biden’s $1.9tn stimulus in March, for discouraging people from returning to work, and many Republican-led states rushed to stop paying the federal benefits as early as June.

Democratic-led states kept them going until this week, but within the White House and on Capitol Hill few made the case to renew them once again.

Even after state-level labour market data showed no meaningful boost to job creation in states that cut off the jobless benefits early, there has been little impetus to keep the unemployment support going into the autumn.

Since March, the US unemployment rate has dropped from 6 per cent to 5.2 per cent in August. “There is no plan to re-evaluate that. As you know, that was temporary,” Karine Jean-Pierre, principal deputy White House press secretary, told reporters on Friday when asked about the end of the jobless benefits.

The Biden administration and many Democrats are instead focusing on the next stage of the president’s economic agenda, which is intended to plough up to $3.5tn in government funding into child care, education and measures to address climate change.

Biden administration economic officials believe that these policies, even if spread over eight to 10 years, are needed to improve the labour market and promote a more equal recovery in the long run, although Republicans have blasted the plan as a reckless spending splurge.

The White House is urging states to use another $350bn pot of money from the March stimulus to provide any immediate assistance for unemployment, but there are scant expectations that a new extension of federal jobless benefits will be enacted soon.

Although some households may be able to rely on some pent-up savings to weather the hit from the loss of jobless benefits, one concern is that the recent slowdown in job creation has been driven by weakness in leisure and hospitality, the sector most adversely affected by the Delta variant, and will disproportionately hit low-wage workers.

“Right now millions of American families are going to lose a lot of income and that takes away a lot of options for them,” said Aaron Sojourner, an economics professor at the University of Minnesota.

The debate over the end of the jobless benefits comes as the impact of $1,400 direct payments in the form of stimulus cheques — another core element of Biden’s stimulus — has faded.

The Federal Reserve is also debating when and how to start winding down its monetary support for the recovery by shrinking its asset purchases. But some economists and strategists believe the US economy is strong enough to withstand the loss of government support.

“We aren’t concerned about a ‘fiscal cliff’ since the end of relief cheques should continue to be offset by gains in employment and wages,” said Ed Yardeni, an independent market strategist.