States that ended unemployment benefits early took a big economic hit – and the rest of the country’s next

• New research finds that ending unemployment benefits early led to people spending a lot less.
• Across the states ending benefits early in June, spending dropped by $2 billion.
• That pattern could only continue as federal benefits are rolled back in September.
• See more stories on Insider’s business page.

In June, 22 states ended their federal unemployment benefits early – and, in 19 of them, spending took a big plunge, while employment did not see a sizable jump.

A new paper from researchers at University of Massachusetts Amherst, Harvard University, Columbia University, and University of Toronto looks at banking data in those states from financial services company Earnin, which the researchers note is used by predominantly low-income Americans.

The impact of cutting off those benefits was a 20% reduction in weekly spending for individuals – which comes to about $145 every week. And those jobless workers also saw a big hit to their wallets, losing $278 in weekly benefits, with weekly earnings only up $14.

All told, the researchers found that, for every dollar in benefits, spending went down by $0.52 (and each dollar lost only saw an accompanying $0.07 rise in new income). Across the states, that translated to a $270 million increase in earnings – but consumer spending fell by $2 billion.

“Clearly, if it had been the case that more people losing benefits were easily able to transition into paid work, you wouldn’t see that sort of reduction and sharp reduction in spending, but that’s what you saw,” Arindrajit Dube, an economics professor at University of Massachusetts Amherst and of the paper’s authors, told Insider.

Ending benefits did have a small impact on employment in those states, compared to states that opted to retain their benefits. About 4.4% more workers in those early-out states had jobs compared to their colleagues in states that kept benefits. But even those gains paled in comparison to how many workers lost benefits completely, with 35% more losing all benefits in states that cut off benefits.

Simply put, the researchers said, “for every 8 workers who lost their benefits, 1 worker found a new job.”

That’s because those recipients were likely on Pandemic Unemployment Assistance (PUA) or Pandemic Emergency Unemployment Compensation (PEUC), two federal programs that respectively expanded who could receive benefits and how long they could get them for.

Federal benefits will end soon, which could bring spending down even more

That data looks at the states that have already opted out of federal benefits, but there’s a cliff still looming for millions of Americans. The left-leaning Century Foundation projects that 7.5 million people will lose all benefits come September 6 – and the Biden administration has confirmed that benefits won’t be extended past September (although the administration also said that particularly impacted states can draw upon American Rescue Plan funds to continue providing assistance).

While there’s no way of knowing what the exact impact will be, the researchers extrapolate that that could lead to $8 billion less in spending in September and October – and that blow to spending could linger as workers continue to slowly return.

That becomes, again, one of eight people over the course of the next month taking jobs, Dube said. “The rest are going to take a lot longer to find jobs.”

“I think one thing that’s clear is that we should worry about consumption drops especially for lower income households and those who don’t have sufficient access to credit and savings,” Dube added. “And so thinking about ways to soften the blow – both at the state and the federal level – could be important. “