Board of Governors of the Federal Reserve System

July 02, 2021

Why Have Initial Unemployment Claims Stayed So High for So Long?

Brendan M. Price

Introduction

As the labor market recovers from the COVID-19 pandemic, claims for unemployment insurance (UI) have been surprisingly slow to return to conventional levels. As recently as 2021Q1, initial claims for regular UI benefits averaged nearly 800,000 per week (see Figure 1)—more than twice as many as were observed at a comparable point during the recovery from the Great Recession.¹ Although initial claims fell substantially this spring, the latest readings are still almost double those observed in the lead-up to the pandemic.² Throughout the recovery, the UI numbers have been consistently hard to square with the degree of improvement evident in other labor market indicators, such as the unemployment rate, job postings, and layoffs.

Figure 1. Weekly initial claims for regular state UI and PUA benefits (in thousands)

Why have initial UI claims remained so high for so long? In this note, I argue that much of the answer lies with the expansions to UI eligibility and generosity implemented in response to the pandemic. I focus primarily on the role of Pandemic Unemployment Assistance (PUA), a federal program that extends income support to self-employed workers and others who are ineligible for traditional UI benefits. Although such individuals would normally have little reason to apply for regular UI, many states have required them to do so as a first step towards obtaining PUA. Using data on UI eligibility currently available through the first quarter of 2021, I estimate that initial claims for regular UI benefits would have been 20 percent lower from 2020Q3 through 2021Q1 if not for increased filing prompted by PUA.

Other changes in UI policy have also kept claims abnormally elevated deep into the recovery. Supplemental benefits of $300 per week (formerly $600) have given unemployed and underemployed workers unusually strong incentives to apply for UI. In addition, almost every state waived its usual job search requirements early in the pandemic. These waivers, most of which were still in effect earlier this year, have made UI benefits available to many individuals for whom caregiving responsibilities or fears of infection have complicated returning to work.

Accounting for last year's UI expansions can thus go a long way towards explaining why initial claims have taken so long to return to familiar levels. By the same token, declining claim volumes in spring 2021 may owe partly to a new round of policy changes, as most states have by now reinstated pre-pandemic search requirements and many are withdrawing from the federal UI programs prior to their nationwide expiration. Initial claims are likely to fall further as the pandemic UI programs phase out and as the labor market continues to heal.

The role of the PUA program

Eligibility for regular UI benefits is limited to workers who have accrued sufficient earnings in UI-covered jobs in a base period leading up to their claim.³ Three groups of workers commonly fall short of this requirement: self-employed workers and independent contractors, who do not pay into the UI system; recent labor market entrants, who have not yet established an earnings history; and wage workers whose earnings fall below the required threshold, either because they work part-time at low wages or because they were jobless for much of the base period.

These groups are strikingly overrepresented among claims filed during the pandemic. Figure 2 plots the share of new claims passing the earnings test, as reported in the Department of Labor's quarterly data on UI monetary determinations.⁴ Prior to the pandemic, this share ranged between 75 and 90 percent, with a modest decline after each recession.⁵ During the pandemic, however, the passage rate fell much more precipitously than in the past: just over 50 percent of new claims satisfied the earnings test in the latter half of 2020, with only a slight rebound in 2021Q1. These unusually low eligibility rates signify an unprecedented influx of applicants with limited earnings in UI-covered jobs.⁶

Figure 2. Percentage of new claims passing the earnings test for UI eligibility

This dramatic shift in the UI claimant pool owes largely to the federal PUA program, which was created in March 2020 to provide benefits to classes of workers not covered by traditional UI.⁷ Because federal guidelines restrict PUA to those who are ineligible for regular UI, many states instruct benefit-seekers that they must apply (and be denied) for regular UI before they can apply for PUA. As a result, many self-employed workers and other atypical claimants have been counted towards both regular UI and PUA in successive weeks, even though initial claims for these two programs are tallied separately in government statistics.

As evidence that PUA has fueled the surge in ineligible claimants, Figure 3 plots the share of new claimants passing the earnings test in three groups of states and territories: those that require claimants to apply for regular UI as a precondition for seeking PUA (27 programs); those that allow individuals to apply directly for PUA (16 programs); and those whose websites provide nuanced or ambiguous instructions (10 programs).⁸ Although passage rates have fallen nationwide, they have fallen much more steeply in states that instruct prospective PUA claimants to first apply for regular UI. These state-level patterns suggest that we would have seen a much more muted decline in eligibility rates nationwide if not for PUA.⁹

Figure 3. Percentage of new claims passing the earnings test, split by state application protocols

A simple back-of-the-envelope calculation can help us gauge what initial claim volumes might have looked like had the PUA program not been created. The first step is to note that initial claims fall into two separate categories, which differ in their relationship to PUA. New initial claims are filed by workers who have not received UI in the recent past. Reopened initial claims are filed by workers who were previously approved for benefits and who are now resuming benefit receipt after an intervening period of employment.¹⁰ I estimate counterfactual initial claims in the absence of PUA as

$$$$ \text{reopened initial claims} + \left(\frac{\text{observed passage rate}}{\text{passage rate absent PUA}}\right) \times \text{new inital claims}, $$$$

where I assume that 75 percent of new initial claims would have passed the earnings test in the absence of PUA, in line with the passage rate observed after the Great Recession.

The logic behind this formula is as follows. By definition, reopened claims originate from workers who have already passed the earnings test—in other words, standard claimants who would most likely be seeking benefits even in the absence of PUA. I therefore make no adjustment to the observed number of reopened claims. By contrast, new initial claims reflect a combination of standard and non-standard claimants. To weed out claims filed by non-standard claimants as a stepping-stone to PUA, I scale down the observed number of new claims based on the unusually low share of claimants passing the earnings test.¹¹

Applying this formula quarter by quarter, I estimate that—if not for PUA—initial claims for regular UI benefits would have been about 7 percent lower in 2020Q2, when PUA was first being rolled out, and about 20 percent lower in each of 2020Q3, 2020Q4, and 2021Q1.

Even with this adjustment, initial claims would still have averaged over 600,000 per week in the first quarter of 2021. Such a tally would be comparable to the weekly counts reported in early 2009, even though monthly worker flows from employment into unemployment were about 50 percent higher in 2009 than they were in 2021Q1. Although PUA is a major reason why claims have been so slow to return to typical levels, it is clearly far from the only reason.

Other institutional factors

A second factor that has boosted initial claims is Federal Pandemic Unemployment Compensation (FPUC), which has provided supplemental benefits of $300 or $600 per week at various points during the pandemic.¹² Take-up of UI benefits among eligible individuals is usually far from universal: qualifying workers may decline to file for UI because of a lack of information, stigma associated with benefit receipt, or an expectation that they will quickly be reemployed. FPUC has given unemployed and underemployed workers unusually strong incentives to claim UI, and there is good reason to believe that take-up rates have risen as a result.¹³ Although take-up rates are difficult to measure in available data, some indirect evidence comes from the unusually high share of 2020–21 UI claimants receiving partial UI benefits while working part-time. Partial UI recipients receive the $300/600 FPUC supplement in full, so FPUC has an especially large proportional impact on UI replacement rates for this group of workers.¹⁴

Alongside PUA, FPUC, and other federal programs created during the pandemic,¹⁵ many states broadened access to their UI programs at the start of the crisis by suspending waiting periods and by waiving their normal job search requirements. These state-level waivers may have drawn more applicants into the UI system, since individuals unable or unwilling to work—for example, because of childcare constraints associated with virtual schooling—might choose not to apply if they would be required to look for jobs.

In addition, UI statistics were heavily impacted in the first months of the crisis by backlogged claims, fraudulent filings, and other irregularities (Cajner et al., 2020; Government Accountability Office, 2020). Although these issues are likely much less consequential than they were early on, they may still be having an appreciable impact on claim volumes in some states.

These institutional factors should largely abate over the course of 2021. PUA, FPUC, and other federal programs are scheduled to expire in September, and many states have chosen to withdraw from them prior to their nationwide expiration.¹⁶ Most states have also reinstated their pre-pandemic job search requirements, and state and federal authorities have worked hard to resolve backlogs and to deter fraud. As the institutional landscape returns to pre-pandemic norms, policy measures unique to the pandemic should have a diminishing impact on reported claims.

The state of the labor market

A final consideration is that labor market conditions over the past year have likely been somewhat weaker than measured unemployment suggests. The official unemployment rate—which is calculated from household responses to the Current Population Survey (CPS)—excludes or undercounts at least four groups of individuals who may be filing UI claims. First, the Bureau of Labor Statistics has cautioned that some unemployed CPS respondents have been misclassified as employed but absent from work. Second, survey response rates have fallen during the pandemic, especially for groups that tend to have higher unemployment rates. The sampling weights used to estimate aggregate unemployment may not fully account for these missing respondents. Third, millions of workers have exited the labor force because of caregiving needs, fears of the virus, or a lack of suitable job opportunities. And lastly, the number of individuals working part-time for economic reasons is still well above pre-pandemic levels.¹⁷

In sum, while much of the recent disconnect between initial UI claims and other labor market indicators can be attributed to changes in UI policy in response to the pandemic, some of it may reflect forms of labor market weakness that other data sources do not adequately capture. As long as initial claims remain far above pre-pandemic levels, they will serve as a weekly reminder that the labor market recovery remains uneven and that much ground is still left to be regained.

I close with a cautionary note about how to interpret these findings. Although last year's UI expansions amplified claim volumes given contemporaneous labor market conditions, they have also influenced those conditions in turn. The pandemic UI programs have provided critical income support to millions of American households, but their net effect on the labor market has been hotly debated: supporters of these programs argue that they have spurred the recovery by buttressing aggregate demand, whereas critics maintain that they have impeded the recovery by disincentivizing job search. My analysis is silent on the question of how the labor market would have fared had UI policy not responded to the pandemic.

References

• Cajner, Tomaz, Andrew Figura, Brendan M. Price, David Ratner, and Alison Weingarden. 2020. "Reconciling Unemployment Claims with Job Losses in the First Months of the COVID-19 Crisis." Finance and Economics Discussion Series Working Paper No. 2020-055.
• Dube, Arindrajit. 2021. "Aggregate Employment Effects of Unemployment Benefits during Deep Downturns: Evidence from the Expiration of the Federal Pandemic Unemployment Compensation." National Bureau of Economic Research Working Paper No. 28470.
• Finamor, Lucas, and Dana Scott. 2021. "Labor Market Trends and Unemployment Insurance Generosity during the Pandemic." Economics Letters, 199(2021): 109722.
• Ganong, Peter, Pascal Noel, and Joseph Vavra. 2020. "US Unemployment Insurance Replacement Rates during the Pandemic." Journal of Public Economics, 191(2020), 104273.
• Government Accountability Office. 2020. "Urgent Actions Needed to Better Ensure an Effective Federal Response." Report GAO-21-191.
• Marinescu, Ioana, Daphne Skandalis, and Daniel Zhao. 2021. "The Impact of the Federal Pandemic Unemployment Compensation on Job Search and Vacancy Creation." National Bureau of Economic Research Working Paper No. 28567.

Acknowledgements

The views expressed here are strictly those of the author and do not necessarily represent the views of the Federal Reserve Board or its staff, nor those of the Department of Labor. I am grateful to Isabel Leigh for excellent research assistance and to Andrew Figura, Charles Fleischman, Ryan Michaels, Seth Murray, and Ivan Vidangos for helpful comments.