In a Nutshell
- Despite huge job losses in 2020, Michigan experienced its highest rate of annual growth in personal income in 35 years.
- Income growth was driven by over $37 billion in federal pandemic-related assistance transfers (e.g., stimulus checks, unemployment insurance supplement, Paycheck Protection Program).
- Michigan appears to have been a particularly strong beneficiary from these assistance programs, particularly from the federal unemployment insurance enhancements. Going forward, Michigan will need to see continuing employment and wage growth to offset the expiration of UI benefits next week.
The onset of the COVID-19 pandemic in March 2020 had an immediate and devastating effect on both the state and national economies. By April, Michigan had shed over one million jobs – about 23 percent of total employment. As of July 2021, the state has only recovered about 75 percent of those job losses, and economic forecasts suggest the state may not see employment return to pre-COVID levels until 2023.
And yet, Michigan experienced a bit of an economic paradox last year. Despite the huge drop in employment, personal incomes actually grew by 7.7 percent from 2019 to 2020; that’s the highest year-over-year growth rate experienced in the last 35 years.
So, why did personal income grow at record levels amidst sizable job losses experienced during the last three quarters of 2020?
The answer is simple: a huge influx of federal COVID-related assistance. From stimulus checks to the Paycheck Protection Program to the unemployment benefit supplements set to expire next week, Michigan residents saw a huge boost in disposable income from a number of federal relief programs designed to mitigate the negative economic impacts of the pandemic. As we have noted in previous analyses of state finances, this added income and the spending that came with it was a key factor in propping up state revenues and avoiding the huge budget shortfall that was initially envisioned.
A deeper look at data from the U.S. Bureau of Economic Analysis (BEA) shows just how large this impact was. The table below breaks out the individual components of personal income for 2019 and 2020. Consistent with the loss of employment, employee compensation – the largest component of personal income – declined by $5.3 billion (a 2.5 percent decrease) in 2020. The overall growth in personal income was due to another factor: an unprecedented 42 percent increase in government transfer payments. Total transfer payments increased by $43.3 billion in 2020, helping drive the $37.8 billion dollar increase in personal income.
Michigan Personal Income by Component
(Billions of $)
Source: U.S. Bureau of Economic Analysis
In a typical year, government transfer payments are largely composed of Social Security payments, Medicare and Medicaid health benefits, state unemployment insurance payments, and other public assistance. However, 2020 was not a typical year. The 2020 growth in transfer payments is largely attributable to new COVID-related stimulus programs launched in the wake of the pandemic.
The BEA estimates that Michigan residents received about $37.5 billion in income from direct COVID-related assistance programs during 2020. That represents virtually all of the 2020 dollar growth in Michigan personal income, and it accounts for 86 percent of the large growth in transfer payments. The $37.5 billion comes from several federal assistance programs:
- $14.3 billion from the Pandemic Unemployment Compensation program which provided $600 per week unemployment supplements through July 2020 and has provided smaller $300 per week supplements since December 2020. This program will expire next week.
- $8.8 billion in Economic Impact Payment stimulus checks
- $6.1 billion from expanded unemployment insurance eligibility (e.g., for gig workers) and extended benefits which are also set to expire next week
- $4.3 billion in forgiven Paycheck Protection Program loans to businesses and nonprofits
- $3.8 billion in other supports including specific assistance to healthcare providers and FEMA wage-loss replacement assistance
In short, the 35-year high in Michigan personal income growth is the direct result of this huge boost in federal COVID-related assistance. Considering the likely secondary effects of these payments, federal COVID assistance turned a bad year for personal income into one of the best years in decades.
This income effect was certainly not unique to Michigan, but it does appear that Michigan was a particularly large beneficiary of all this aid. BEA data summarized in the table below suggest that these same COVID-related assistance programs added $927 billion to U.S. personal income in 2020; that’s 4.7 percent of all personal income nationally. In contrast, Michigan’s allocations amount to 7.1 percent of Michigan personal income. Furthermore, Michigan received $3,759 in assistance on a per-capita basis versus the $2,813 per-capita realized nationwide.
COVID-Related Assistance During 2020
(Amounts in Billions of $)
Source: Research Council calculations using U.S. Bureau of Economic Analysis data
The data also suggest that Michigan was a particularly large beneficiary of the weekly unemployment supplements and the other policy changes to enhance unemployment insurance benefits relative to the rest of the country. Per-capita assistance across the weekly supplements and other enhancements was $2,058 – 76 percent higher than the nationwide per-capita allocation of $1,171 for those same categories.
Some of this assistance continues in 2021, as does its economic impact. BEA data show Michigan received another $22 billion in personal income deriving from these COVID-related programs during the first quarter of 2021. About $15 billion of that is related to the final round of Economic Impact payments, but almost $6 billion is tied to ongoing unemployment insurance (UI) enhancements. With the federal UI enhancements expiring next week, Michigan (and other states) will need to rely on strong continued growth in employment and wage earnings to offset both the direct and indirect economic impact of those expiring benefits to avoid a slowdown in the economic recovery.
However, it is clear that in 2020, the large injection of federal COVID-related assistance played a critical role in propping up a Michigan economy that was struggling with employment declines. Time will tell how effectively the state can wean off of this assistance and transition back to what hopefully will be a full-employment economy.
Permission to reprint this blog post in whole or in part is hereby granted, provided that the Citizens Research Council of Michigan is properly cited.