Understand Your Finances
Unemployment insurance, a buffer for the jobless
New JPMorgan Chase Institute study explores the impact of unemployment insurance
In 2004, Dan Nainan lost his job in a Los Angeles, California, record company's IT department. For nine months, while he looked for another job, Nainan collected $405 a week in unemployment insurance benefits.
"I used it to pay for necesseties, like groceries and gas," he says. Without it, he says, "I would have been in very bad shape financially."
Nine months is longer than most people collect unemployment insurance (UI). But for Nainan, that time—and the checks—formed a critical bridge to a new life.
Nainan landed a job at a tech company, and it was a turning point. He was tasked with doing live product demonstrations in front of large groups, and he got stage fright. So Nainan took a class in stand-up comedy, and realized he had knack for it. Now, he's a full-time comedian and performs around the world. "If my benefits had been cut off," he says, "I probably would have taken anything, and ultimately would never have found the job which led to my comedy career."
Being unemployed is almost a universal experience. Surveys show that more than 90 percent of baby boomers experience unemployment at least once. Every year, one in four adults find themselves out of work. Luckily, for some people, UI is available to ease the sting of lost income.
UI is intended to protect workers against the consequences of job loss, but the truth is that most unemployed people do not receive it. Due to the rise of independent contractors, relatively low labor participation rates and an increase in the fraction of the unemployed population that are long-term unemployed, only 27 percent of the unemployed in the United States receive UI benefits—and that number is shrinking. These trends have stirred debates, especially in many state legislatures, about the future of work and how the benefits program might be redesigned.
The JPMorgan Chase Institute recently studied the spending habits of the unemployed, and found that UI is quite effective at preventing large spending drops among people who are unemployed for relatively short periods—six months or less. The study looked at an anonymous sample of 160,000 regular Chase customers who received the insurance between 2014 and 2016 across 18 states.
The study is the first-ever look into comprehensive and high-frequency measures of spending behavior among a large sample of the unemployed in the U.S. The study is especially important because there have been recent policy proposals to expand coverage of UI benefits to part-time workers, and those who have to leave a job due to family emergencies. Some states, notably Florida, have also cut down the length of UI to just 12 weeks, compared to the 26-week norm in most states. "Recent workforce trends have stirred lively debates about the future of work and how the social safety net might be redesigned for the 21st century," says Diana Farrell, CEO of the JPMorgan Chase Institute. "The fact base presented by our new report can help inform efforts to reform UI and develop other measures to address these new challenges."
Here are some key takeaways from the study:
UI protects families from a dramatic income gap: Around the time of a job loss, which is usually about a month before UI benefits are received, take home labor wages fall $1,826 a month, on average. Once UI benefits kick in, that number shrinks to only $617 a month.
UI prevents drops in spending: The path of spending mirrors the path of income in the wake of unemployment. This is important, because out-of-pocket expenses for things such as medical bills and insurance payments can go up after a job loss, since employers were usually covering them.
The study found that due to UI, spending drops by only about 5 percent during short-term job loss, averting a 74 percent drop when UI is not available. Income and spending recover within 18 months for the short-term unemployed but remain depressed for the long-term unemployed – those who remain unemployed for six months or longer and whose UI benefits expire.
Discretionary spending drops at the onset of unemployment: The study found that spending on things such as flights, hotels, gas and entertainment tend to drop immediately at the onset of unemployment, some of which are expenses linked to work. Groceries and utilities drop as well, but only slightly.
Even with the small drop in spending, the study found that most UI recipients do not cut back on paying debts—such as mortgages and auto loans. The major exception was student loan payments, which drops significantly upon job loss and then further when UI benefits run out. One explanation may be that there are higher consequences for not paying a mortgage or an auto loan, whereas student loans can be adjusted or put on hold when someone is unemployed.
Access to liquid assets cuts job loss spending by about half: Having a back up of liquid assets may alleviate the financial burden of being out of work. The study found that during unemployment, credit card usage went up only slightly, by about $19 a month, and checking account balances fell modestly, dropping only about $43 a month.
Liquid assets, it seems, mitigate the spending drop associated with job loss. Families with low liquid assets cut their spending by eight percent, while those with high liquid assets cut theirs by only four percent.
The study also found that an extra $100 a month in UI had the same effect on spending as having an extra $8,000 in liquid assets.
Implications for policy: With almost one-third of unemployed people receiving UI benefits, expanding benefits would likely help others smooth their consumption when they are out of work. Considering the changes in the American labor force, especially in the era of increasing alternative work arrangements, the study implies that expanding UI eligibility would help more people. The level and duration of UI benefits are also key considerations that present an important tradeoff: when UI benefits are less generous the longer term unemployed experience more economic hardship but also go back to work sooner.
Pauline Millard is a Chase News contributor. She started her career at the Associated Press and has written about personal finance and careers for LearnVest, The Muse, and other outlets.