Note: Figure 1 was updated on January 8th with data based on the December Employment Situation Report.
For nearly a century, American households have relied on social insurance programs to bolster financial resources when workers experience an unexpected loss of income or when resources are insufficient to meet basic needs. Sometimes these programs offer general cash benefits, such as unemployment insurance, which provides financial support for the unemployed. In other instances, the benefits are more targeted, such as rental assistance or subsidized health insurance.
In the spring of 2020, in response to the COVID-19 pandemic and its associated recession, policymakers originated significant expansions to social insurance, including unemployment insurance benefits, refundable tax credits, and paid leave. Because of this expansion, the average household experienced an increase in purchasing power, even as the labor market and employee compensation sharply contracted during the spring of 2020. However, because a number of those expansions were temporary, support from social insurance significantly receded after the spring even as the labor market only partially recovered.
Another relief bill enacted at the end of 2020 ensured that social insurance support was not abruptly withdrawn at the end of December. The legislation includes a perpetuation of unemployment insurance benefits as enhanced under the CARES Act, as well as additional payments to recipients; a one-month eviction moratorium extension and rental assistance; additional refundable tax credits; support for small businesses and child care centers; and additional food assistance. However, some forms of social insurance that were put in place in the spring—namely paid sick leave—were not extended in the recent legislation. Additionally, some of the provisions, most significantly the expansion of unemployment insurance and the eviction moratorium, expire too soon.
The labor market will likely continue to face significant headwinds over the next few months, despite the recent legislation. The surge in the pandemic and slow vaccine rollout—which of course, most worryingly, has heartbreaking consequences—creates enormous challenges for the economy as businesses and households pull back on economic activity. In addition, as described in a piece published in the summer of 2020, several factors will slow the labor market’s recovery: elevated long-term unemployment, millions of jobs being permanently lost, and millions of individuals having dropped out of the labor force. A robust labor market recovery depends on controlling the pandemic, swiftly distributing vaccines, and supporting businesses and households that have been financially devastated by the crisis.
The Challenges in the Labor Market
The COVID-19 recession created enormous challenges in the labor market. The contraction in employment was much larger and faster than in previous recessions (figure 1). To date, the recovery has been only partial and has slowed in recent months, with the Bureau of Labor Statistics reporting that total employment in November was still 9.8 million workers below its level in February. Alongside those developments, the Bureau of Economic Analysis has reported that compensation of employees was lower from April through July than in the previous year, with an average reduction of roughly 3 percent and only modestly higher in more recent months.
To be sure, those challenges have not been evenly felt across the workforce; there are substantial racial differences in the share of those who are unemployed specifically due to a job loss. For example, as shown in figure 2, over 20 percent of Native American and Hawaiian workers were unemployed due to a job loss in April, while 11 percent of white workers were. Even Asian workers, who were the least likely to be unemployed due to a job loss before the recession hit, have been significantly more likely to be unemployed due to a job loss since April than white workers. Since May, all non-white worker groups have followed a similarly elevated rate of monthly job losses; and although their rates are approaching their white counterparts’, the many months of greater job losses inflict disproportionate labor market pain on non-white workers. Moreover, many of the same racial and ethnic minority groups experiencing greater labor market pain have also been at increased risk of contracting and dying from COVID-19.
Other types of inequities in labor market outcomes have led to stark differences in which households expect a drop in employment income. As shown in figures 3a and 3b, lower-income adults (figure 3a) and those residing with minors (figure 3b) have consistently been more pessimistic regarding their labor market income. These populations follow similar trends, with the most economic anxiety in early summer, a brief reprieve going into fall, and slowly heightening worries starting in late fall and into the present day. However, low-income workers are significantly more worried about labor income loss than those with higher incomes; and workers living with children are significantly more worried than their childless counterparts. In addition, although the different demographic groups’ income expectations have moved together, the expectations of lower-income people and people living with children have generally worsened more quickly and improved more slowly. Given these patterns, it is not surprising that the social insurance system has targeted lower income households and those with children.
Increases in Disposable Personal Income from Social Insurance
As a result of social insurance policies, disposable personal income (total after-tax income, or DPI) in 2020 was higher relative to 2019 despite weakness in aggregate compensation of employees. In particular, from April through November, DPI was higher by almost 10 percent on average. Congress enacted significant increases in social insurance through policies that included increased and expanded unemployment insurance benefits, payments to business owners, increases in food benefits, paid leave, and refundable tax credits. (Recent legislation offers support to childcare providers, although it does not extend the paid leave benefits into 2021.) In addition, to a smaller degree, automatic stabilizers— structural mechanisms built into government spending and revenue that automatically offset economic fluctuations—led to increases in income in 2020 from multiple sources, such as: benefits paid to the unemployed, an increase in food benefits for some participants in the Supplemental Nutrition Assistance Program and for families with children who qualify for free or reduced-price school meals, and a reduction in taxes. As a result, from March 2020 to November 2020 disposable personal income has been higher every month than in the prior year.
In Figure 4, the diamond-studded black line on each bar shows the 12-month net change in DPI between each month of 2019 and 2020 (e.g., April 2019 by April 2020); the stacked bars illustrate how different components of DPI contributed to that change. When the COVID-19 recession’s economic effects were at their worst in April 2020, levels of compensation of employees (the blue bar) and proprietors’ income (the green bar) were significantly lower than they were in April 2019. However, the CARES Act provided a large increase in government social benefits relative to April 2019, which led to a large net increase in DPI. Although government social benefit levels decreased after April, they remained elevated beyond their 2019 levels such that the 12-month change in DPI has remained positive.
A growing body of research has shown that consumer spending among lower-income groups has been effectively supported by social insurance benefits since March. Increasing the value and reach of social insurance was instrumental for maintaining spending, largely because many of the same households experiencing a decline in labor income lacked sufficient wealth or other resources to weather a temporary loss in earned income. To be sure, wealth holdings for many households were already nowhere near sufficient to face the recession. For example, The Hamilton Project recently documented that in 2019, the typical Black household only held $24,100 in wealth—7.8 times less than the median white household’s wealth ($188,200).
Policies to Address Insufficiencies in Social Insurance
In March 2020, Congress determined that existing social insurance programs were insufficient in helping households meet the challenges created by the COVID19 recession. Among the many examples of those deficiencies, the unemployment insurance system left out millions of workers who were laid off at the start of the pandemic. Additionally, millions of those who were able to keep their jobs had no paid sick leave benefits—both egregious and dangerous in a pandemic. In addition, small businesses only had access to limited resources when their revenues dried up overnight.
The CARES Act and other legislation filled in many of the gaps that automatic stabilizers did not serve, but ample evidence shows that the increases in social insurance did not reach all households in need. The most compelling piece of evidence for this lies with food insecurity: in early November, the share of households reporting that they have suffered from food insecurity was twice the percentage in the years leading up to the pandemic. In addition, a survey of renters in professionally managed buildings shows that beginning in the spring, fewer households were able to make their rent payments relative to 2019. And, of course, hundreds of thousands of small businesses have permanently closed their doors as a result of the pandemic.
Going forward, Congress can improve automatic stabilizers so that ad hoc policymaking in the face of an economic downturn becomes the exception, rather than the rule. Such changes to the social insurance system would help strengthen the economy and enhance individual economic security. In early 2021, The Hamilton Project will build upon its prior work and publish a series of policy proposals outlining ambitious ideas to improve the American social insurance system. The proposals will rethink the intersection of social insurance across a range of policy areas, including workforce development, housing support, unemployment insurance, paid leave, and child care.
Acknowledgments: The authors thank Lauren Bauer, Kriston McIntosh, and Kristen Broady for helpful feedback. Becca Portman provided graphic design and Moriah Macklin contributed research assistance.