Posted by: Josh Lehner | June 22, 2021

Federal Aid Mutes Job Loss Impact Across States

This morning the Bureau of Economic Analysis released the 2021q1 state personal income data. Click over there to dive in yourself. I am likely currently stuck in a bison-induced traffic jam somewhere in Middle America. But that doesn’t mean you get off that easy. I do have an updated look at incomes across the U.S. for you. (And will dig into the new data in the weeks ahead, after I return.)

We know this cycle is different. We tend to usually think of state’s economies, and incomes tracking with the labor market, because they usually do. But not so far in the pandemic. Regardless of local employment trends, or the various return to normal type indices of activity, personal income growth is pretty much the same across all states. The reason is simple: federal aid. In particular the enhanced unemployment insurance benefits help states with larger job losses, and the recovery rebates went to households in every state. Remember, the goal of the federal aid was to ensure that unemployed workers did not have to take a job for financial reasons if they didn’t want to during a global pandemic*.

You can see this overall dynamic in the scatterplot below. Let’s first start with the light blue dots, which compare employment loss and changes in wages. As expected there is a clear, strong relationship. States with larger job losses, experienced larger declines in wages (or smaller gains). That’s pretty straightforward. Now, let’s shift to the dark blue dots. Here you can see there is hardly any relationship between job loss and total personal income growth last year. In fact if you look at the coefficients in the simple regressions and do the math, it shows that the federal aid mutes about 87% of the impact of job losses when comparing wages and total income. That’s not a perfect calculation, but the impact, and magnitude of federal aid is clear.

Now, this pattern should have held through today’s new data for 2021q1 given we saw large recovery rebates in March (the $1,400 per person). Moving forward, we would expect to see state incomes diverge based upon those underlying economic and labor market gains. States with strong job growth will see stronger income gains. However we’re not at that point in the cycle and expansion yet, thanks to federal aid which has more than plugged the financial hole caused by the pandemic.

* I put strong household incomes at the top of the list of labor supply constraints today, but the impact of the rebates will fade and the UI expires in a couple of months, these are temporary.

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