7 percent of personal income in 2020 came from unemployment benefits

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Following the COVID-19 pandemic, many people—primarily people who worked in the hospitality and service industries—were laid off from work. To mitigate the economic impact, Congress passed several bills that included stimulus payments and pandemic unemployment assistance (PUA). These benefits, in addition to others, provided a higher level of income to people and affected their spending habits.

Still, the economy didn’t act as many experts predicted. Despite a high unemployment rate and a recession, the COVID-19 pandemic didn’t follow typical recession patterns. The Federal Reserve Bank of New York published an analysis in which it stated, “The recession was unique in the speed with which it took hold, the types of workers it affected and the nature and size of the policy response.” 

With PUA, the average worker earned 145 percent of their income in 2020

PUA was rolled out during the pandemic, and according to JP Morgan Chase & Co., the PUA resulted in massive increases in personal income: “It authorized a $600-per-week supplement, which increased the value of unemployment benefits, such that the median jobless worker received unemployment benefits equal to 145% of their pre-job loss wages compared to 50% in normal times.” 

This increase in income is greatly reflected in some of the spending that occurred during the pandemic. Surprisingly, during a time of economic uncertainty and decreased job security, individuals paid off debt at rapid rates.

The first stimulus check was officially signed and announced on March 27, 2020. Qualifying Americans were told they would receive this first check as early as mid-April. This seemed to spur instant action among consumers. On April 15, there was a sudden spike in debt payments as people started to receive their first check. These payments were 25 percent higher than the previous tax season. 

Once Americans began receiving their pandemic relief payments, debt repayment continued to be a priority. The rate of debt lump-sum payments was 50 percent higher than the previous year. And individuals who signed up for debt payment plans chose short payment terms with higher monthly payments. 

Americans repaid close to $83 billion in credit card debt in 2020, which was a new record. It was clearly a challenging year in many ways, but for some, it was an opportunity to get rid of debt and become more financially secure. 

Under the CARES Act, more people qualified for unemployment benefits

Another notable reason for the personal income growth is simply that more people qualified for these new unemployment benefits. The CARES Act expanded eligibility for the PUA program. This adjustment allowed self-employed individuals and contingent workers to receive unemployment benefits. These employees could also continue to work while collecting PUA benefits. However, they had to report all income earned, and this income would be calculated against future benefits. 

Unemployment benefits contributed to 7 percent of total personal income in June 2020

During the Great Recession around 2008, unemployment benefits accounted—at their peak—for 1 percent of people’s personal income. The COVID-19 pandemic broke this record many times over. A fast and significant rise in unemployment benefits meant that, on average, 7 percent of people’s personal income in June 2020 was from unemployment benefits. 

Some theorize that social financing from the government keeps people from returning to work. This argument especially singles out people who received unemployment benefits on par with or greater than their regular income. However, multiple studies have shown this to be false. For example, one study of the pandemic found that there is “no evidence that the additional pandemic compensation passed under the CARES Act last year ‘held back the labor market recovery.’” 

Spending of the unemployed was actually higher than that of the employed

A study conducted by Chase monitoring the spending habits of clients who received—and lost—unemployment benefits during 2020 found some nontraditional patterns. For example, the unemployed actually increased their spending by 22 percent (compared to when they were employed) after receiving their benefits. However, the same group also saw a 14 percent spending decrease in August when the $600 benefit ended. 

This is a particularly interesting behavior because normally, even with unemployment benefits, people tend to decrease their spending after losing a job. 

At one point, spending by the unemployed was higher than that of the employed. From April to July, the unemployed spent 11 percent more than their employed counterparts. However, this shifted back in August, at which point the unemployed spent 1 percent less than the employed. 

So, what did people spend their money on? According to research from JP Morgan, during the pandemic, consumers increased spending on household cleaners, soap, hair color, vitamins and supplements and coffee. The products that saw more than a 25 percent drop in purchase rates included cosmetics and sun care products.

These spending patterns align with the general thinking and behaviors during COVID-19. People were worried about their safety and health and purchased cleaning products and vitamins. They couldn’t go to salons and worked from home, so they had to buy more coffee and hair products. On the other hand, people stopped leaving the house and going to events, so cosmetics and sun care products weren’t necessary anymore. 

People facing unemployment doubled their savings with PUA

The unemployed roughly doubled their liquid savings over the four months between March and July 2020 but then spent two-thirds of the accumulated savings in August alone. This behavior really tells the story of the average unemployed person during the pandemic.

During unemployment, there were limited recreational activities to take part in, so saving was relatively easy. However, when the PUA stopped in August, the job market was just as tight as ever before. As people struggled to find jobs, they had to dip into those savings to pay their living costs. 

When PUA ended, most households spent in one month what they had saved over the previous months

The typical unemployed family spent all that they had saved over the course of the previous four months in just one month. As mentioned above, this is likely due to the sudden stop of PUA and the inability to get hired immediately. 

Another factor is where individuals chose to put their money. For example, RV company Outdoorsy saw an increase in revenue of 4,600 percent from April 2020 to October 2020. While travel by plane became somewhat more complicated, people sought alternatives, and the RV industry saw a massive spike. 

If individuals were sitting on several months’ worth of savings, they could have spent all that money at once on debt repayment, big purchases or living costs. 

Unemployment resources and financial aid

To date, 25 states have said they’ll be ending federal unemployment insurance programs, including the Pandemic Unemployment Assistance program (PUA). The PUA is coming to an end for good reason. Widespread vaccination is in process, and the economy is slowly opening up again. Additionally, the unemployment rate is on the decline. 

Still, this change can feel overwhelming for those who depend on PUA or are having trouble finding a new job. If you’re concerned about your finances or the state of your credit score, please feel free to reach out to our services for a free credit consultation. There are ways we can help you prepare and set yourself up for financial security. 

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