Tuesday, January 28, 2014

The Long-Term Unemployed: What Happens When Benefits End?

At the end of 2013 Congress allowed the federally-funded extension of unemployment benefits to expire. This will eliminate benefits that extend beyond those available under state-financed plans (normally about 26 weeks). It is uncertain whether or not the funds will be allocated to renew the extended benefits.

Liberals are upset because the number of long-term unemployed (greater than six months) continues to be large. This view is supported by an article by Heidi Shierholz. She provides this chart to support this perspective.

The chart indicates the date at which extended benefits were discontinued at various times of high unemployment. The purpose is to indicate that long-term unemployment is currently twice the rate at which extended benefits were terminated after previous recessions.

A more conservative observer might look at that plot and conclude that extended benefits have already done their job and the economy is strong enough to absorb those who are really determined to find work.

In fact, it is difficult to draw firm conclusions from the data. Termination of extended benefits in the past did not prevent the number of long-term unemployed from continuing to fall. Taken at face value, this implies that, in a macroeconomic sense, the economy continued to recover and continued to absorb the unemployed at about the same rate. On the other hand, the chart assumes that all recessions are equal and lessons from the 1960s and 1970s are applicable now. The recovery after 2003 has been described as jobless. There were, in fact, no net private sector jobs created during the Bush administration’s eight years. It could be that the slow recovery from the recent recession will render a greater fraction of the working population unemployable for a much longer period than expected.

Macroeconomic analyses avoid addressing the fate of the individuals whose unemployment benefits are suddenly terminated when extended programs are cancelled. Are they forced to take less desirable jobs as conservatives like to believe? Or, are they left further impoverished and suffering as liberals assume? Joshua Green produced an interesting article for Bloomberg Businessweek that suggests the issue is more complicated than either side might believe.

Green suggests that for evidence for what happens when extended unemployment benefits are cut we should turn to North Carolina for data.

"Last February, at the behest of the business community, Republican Governor Pat McCrory signed a bill cutting the amount and duration of state jobless benefits, even though North Carolina’s unemployment rate ranked among the highest in the country. The state had exhausted its unemployment trust fund, paid for by business taxes, and had borrowed $2.5 billion from the federal government to pay jobless claims."

"When the new law took effect on July 1, the maximum weekly benefit fell to $350 from $535 and its duration fell to between 12 and 20 weeks, depending on the state’s unemployment rate, from 26 weeks -- the standard in most other states."

"That was only half the blow. Reducing state benefits violated the terms of the federal program -- which is intended to supplement, not replace, state aid -- so workers in North Carolina were also disqualified from receiving federal benefits."

What was the result of this drastic measure?

"At first glance, the effect appears to be positive. North Carolina’s unemployment rate dropped dramatically, from 8.8 percent to 7.4 percent between July and November. By comparison, the national unemployment rate fell by 0.6 percentage point over the same period."

"A closer look, however, suggests that North Carolina’s unemployment numbers have fallen not because the long-term jobless have found work; it’s because they have quit looking. As a result, the state no longer counts them as unemployed."

Green tells us that in the period November 2012 to November 2013 the number of unemployed people in North Carolina fell by 101,901, but the number of employed people increased by only 6,082. This implies that 95,009 people dropped out of the labor force. Green attributes this to unemployed people who quit looking for work after unemployment benefits expire.

In a second article, Green provides this plot of the monthly percentage change (year over year) in North Carolina’s labor force.

Note that the percentage gain was approaching zero as the unemployment benefit cuts were to be imposed on July 1, 2013 and went negative around that time. One could interpret this behavior as a continuation of a long-term trend, or, as Green suggests, as mainly the result of the cut in benefits.

If Green is correct, the cuts imposed nationally at the end of the past year will drive many more people out of the job market across the country. It will be interesting to see how this plays out in the coming months.

There does not seem to be a simple explanation for why people drop out of the labor market and quit looking for work. It would seem to be important to understand this phenomenon since it represents a large loss of potential economic activity. The message Green is conveying is that if he is correct, there is something very wrong with our economy and our society.

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