Helping Workers during Recessions

When a recession hits, the federal government usually responds with tax cuts and additional financial assistance, because automatic policies built into the law often prove inadequate and elected officials need and want to respond to the crisis. This brief compares the distributional and stimulus impacts of five fiscal policies aimed specifically at workers: Unemployment Insurance, the Making Work Pay (MWP) tax credit in effect 2009 and 2010, a 2-percentage point payroll tax cut like that in effect from 2011-2012, a hypothetical modified Making Work Pay tax credit with a larger benefit but shorter phase-out range than the original MWP credit, and a temporary 50 percent expansion to the Earned Income Tax Credit (EITC).

We find Unemployment Insurance to be the most targeted of the policies—providing the highest average benefits for every quintile, but to a small number of beneficiaries. The four simulated tax policies provide lower average benefits to a broader set of beneficiaries. The temporary payroll tax cut was the costliest and least progressive of the policies, while most other policies concentrated most benefits on the second and middle income quintiles. The expanded EITC was the most progressive policy, providing nearly 80 percent of all benefits to the bottom 40 percent of households.