Economic Effects of Additional Unemployment Benefits of $600 per Week

At the request of Senator Grassley's staff, CBO has examined the economic effects of extending the temporary increase of $600 per week in the benefit amount provided by unemployment programs. Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, that increase in unemployment benefits is in place through July 31, 2020. CBO estimates that extending that increase for six months through January 31, 2021, would have the following effects:

• Roughly five of every six recipients would receive benefits that exceeded the weekly amounts they could expect to earn from work during those six months.
• The amount, on average, that recipients spent on food, housing, and other goods and services would be closer to what they spent when employed than it would be if the increase in unemployment benefits was not extended.
• The nation’s economic output would probably be greater in the second half of 2020 than it would be without the extension of the increase; in calendar year 2021, however, output would be lower than it would be without the extension.
• Employment would probably be lower in the second half of 2020 than it would be if the increase in unemployment benefits was not extended; in calendar year 2021, employment would be lower than it would be without the extension.

The estimated effects on output and employment are the net results of two opposing factors. An extension of the additional benefits would boost the overall demand for goods and services, which would tend to increase output and employment. That extension would also weaken incentives to work as people compared the benefits available during unemployment to their potential earnings, and those weakened incentives would in turn tend to decrease output and employment.

In the second half of 2020, CBO estimates, the signs of the effects would probably be opposite: Output would be greater and employment lower— because workers employed as a result of the boost in demand would have higher average earnings (and contribute more to output) than the people who were not employed (because of the extension’s effect on work incentives) would have had if they were employed. The following simplified illustration shows how output could increase while employment fell: As a result of the extension of the additional benefits, a group of workers with average earnings became employed, and a group twice as large whose earnings would have been less than half the average amount were not employed.

In calendar year 2021, both output and employment would be lower than they would be if the increase in unemployment benefits was not extended. That would occur mainly because the effect of the reduced labor supply would, in CBO’s assessment, last longer than the effect of increased overall demand.

To respond rapidly to your questions, in this letter CBO discusses the direction of the effects of additional unemployment benefits but not the magnitude of those effects. The agency is continuing to develop its capacity to quantify the effects of changes in different types of unemployment benefits.