Hutchins Roundup: Pandemic unemployment benefits, corporate tax cuts, and more 

What’s the latest thinking in fiscal and monetary policy? The Hutchins Roundup keeps you informed of the latest research, charts, and speeches. Want to receive the Hutchins Roundup as an email? Sign up here to get it in your inbox every Thursday. 

Early end to expanded unemployment benefits led to increased employment  

Using data from the Consumer Population Survey and Household Pulse Survey, Harry Holzer of Georgetown, Glenn Hubbard, of Columbia and Michael Strain of the American Enterprise Institute find that the early termination of expanded pandemic unemployment benefits by 18 states in June increased the flow of unemployed workers into employment by 14 percentage points, a boost of about a two-thirds. The effect is slightly smaller among workers without a college degree, those who last worked in leisure or hospitality, and those reporting high confidence in their ability to meet their household expenses. Had all states ended extended benefits in June rather than September (when the federal government suspended them), the results imply that the national unemployment rate in July and August would have been about 0.3 percentage point lower. However, the authors also find that the expiration of expanded benefits  lowered by 5% the share of households reporting no difficulty meeting expenses in the past seven days. The overall welfare implications of early termination are therefore uncertain, they conclude.  

Corporate tax cuts widen within-firm earnings disparities  

The Domestic Production Activities Deduction – which lowered corporate taxes on income from certain domestic production activities from 2005 to 2017– increased compensation for workers at the top of firms’ earnings distributions significantly more than for those at the bottom, find Christine Dobridge of the Federal Reserve Board and Paul Landefeld and Jacob Mortenson of the Joint Committee on Taxation. By linking U.S. worker-level W2 filings to firm-level corporate tax returns, the authors show that a 1 percentage point reduction in the typical firm’s marginal tax rate had no effect on wages at 0 to 10th percentiles of the income distribution, and only raised the median wage by 0.5%. In contrast, for workers in the 90th, 95th, and 99th percentiles, a 1 point reduction in the marginal tax rate increased wages by 0.9%, 1.3%, and 2.7%, respectively. Of the total national earnings boost from the tax cut, about 5% went to firm owners. Disparities in earnings boosts were particularly large for small firms, which also increased employment in response to the cuts. Large firms, on the other hand, saw employment decline and capital investment rise—suggesting that the deduction encouraged large corporations to substitute away from labor and towards capital.  

The Fed’s Main Street Lending Program boosted bank lending during the COVID crisis  

The Federal Reserve established the Main Street Lending Program (MSLP) at the onset of the COVID-19 pandemic to support bank lending to small- and medium-sized businesses. Using supervisory loan-level data and surveys on banks’ lending standards, Camelia Minoiu, Rebecca Zarutskie, and Andrei Zlate of the Federal Reserve Board find that the program increased banks’ general willingness to lend – even though banks didn’t tap the program much. Compared to banks that were eligible but did not participate, MSLP-participating banks were less likely to tighten lending standards amid pandemic-induced uncertainty about credit risk and the economic outlook, the authors find. The program led MSLP-banks to make larger corporate loans and lend more to small businesses overall than non-participating counterparts. The authors estimate that absent the program, the total value of corporate loan renewals and originations (both from MSLP and non-MSLP banks) in Q3 of 2020 would have been 10% smaller. The findings suggest that “banks viewed [the program] as a safety net that they could activate if economic conditions deteriorated,” the authors conclude.  

Chart of the week: US population grew by 0.1% in 2021, the slowest rate in the nation’s history 

Quote of the week:  

“[W]hen schools opened and vaccination rates were getting better and some of the vaccination was rolling down to younger children, I had a hope, and I think many people did, and even an expectation that this would dislodge some of the sluggishness of labor supply. And women with children and people who were a little bit nervous about coming back to work would feel more comfortable and feel more prepared and able to come back. But that has been extraordinarily sluggish relative to my expectations. And when I ask people when I’m out doing contact calls and talking to businesses and community leaders and employees, union members, they all tell me the same thing, that they’re nervous about Covid still. And it’s not off our shores, right? It doesn’t feel as under control as people would like it to feel, to make sure that they can leave their kids at school if they take them, that they can get a job and it won’t be reduced in hours or canceled altogether, or that it’s safe. If there are lots of unvaccinated people at their workplace, is it really safe to go even if you’re vaccinated? All of those things make the labor supply sluggish,” says Mary Daly, President of the San Francisco Fed. 

“And when I talk to my firms and businesses, they’re telling me that it’s just almost impossible to find workers at this point. And this is shuttering businesses…mall businesses shuttering on Sundays, even though they’re in the middle of the holiday season…We have a ‘shop small’ kind of party. And so we were out walking around, and a number of them are closed with signs that say: We can’t find any workers… [D]ata are telling us that we’re nearing that maximum employment we can have today, even though I do not think this is maximum employment in the longer run. It’s not the post-COVID maximum employment. I am very hopeful we’ll get the recovery of labor supply sooner than later, but I can’t bank on that.” 

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