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North Carolina Cut Jobless Benefits and the Sky Didn't Fall

January 10, 2014

By Diana Furchtgott-Roth

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As the House of Representatives ponders whether to follow the Senate’s example and extend unemployment benefits, members might want to consider the case of North Carolina, where employment has increased and unemployment has declined from 8.8 percent to 7.4 percent in the five months following dramatic cuts in the state’s unemployment benefits.

The decline in the duration of unemployment benefits did not necessarily cause the employment gains, but it did not harm the state’s economy. So much for those who say the sky will fall if Congress does not extend federal emergency unemployment insurance benefits, which expired at the end of 2013.

In June, North Carolina cut the duration of benefits from a maximum of 63 weeks to a maximum of 19 weeks. The state’s subsequent employment growth outperformed not only its neighbors—Virginia, Tennessee, South Carolina and Georgia—but also the rest of the United States. Neighboring states had durations of unemployment benefits ranging from 63 weeks in Tennessee to 40 weeks in Virginia.

During the recession, which ended in June 2009, the federal government funded the expansion of unemployment insurance benefits to 99 weeks through May 2013 and 73 weeks through December 2013. The average duration of benefits at the end of 2013 was 55 weeks.

Without House action, the unemployed will receive a maximum of 26 weeks of benefits, paid by state unemployment insurance funds to which employed workers and their employers contribute. But states can choose to cut benefits below 26 weeks, as North Carolina did in June, making it an example worth studying.

Employment in North Carolina grew by more than 22,000 between June and November, about half a percent, according to the Labor Department’s Current Population Survey. It declined in Virginia, Tennessee and Georgia, and increased by a modest amount in South Carolina. In the rest of the country, employment declined slightly during those months. North Carolina also did better than border states and the United States as a whole in the Labor Department’s survey of establishments. Over the same time period, the number of unemployed in North Carolina declined by 17 percent, more than its border states (8 percent) and more than the rest of the United States (5 percent).

While North Carolina’s labor force declined by 1 percent between June and November, more than the United States as a whole, this is similar to the average decline in the border states. These regional comparisons are necessary to get the full picture. The labor force shrank more in Georgia and South Carolina than it did in North Carolina. What is significant is that employment grew in North Carolina while the duration of unemployment benefits declined.

Speaking at the White House on January 7, President Obama said, "Independent economists have shown that extending emergency unemployment insurance actually helps the economy, actually creates new jobs."

But economic research performed by Obama’s own advisers and the Congressional Budget Office show that the longer the duration of benefits, the longer the unemployed stay out of work. This is one reason why, when the length of benefits in North Carolina was cut, employment increased.

The reason is this: If the unemployed have a source of income, they are more likely to turn down lower-paying jobs—even though they are losing job skills by remaining out of the labor force. The longer the unemployed are out of work, the more their skills atrophy. It is a vicious cycle leading to more long-term unemployment, a characteristic of this recession.

New data released on Friday show that in December, more than four years after the end of the recession, 38 percent of the unemployed were defined as long-term unemployed—out of work for 27 weeks or more. This level of long-term unemployment is higher than the peaks of prior recessions and, it’s not a mystery: It’s intricately linked to the length of unemployment benefits.

Two former Obama economic advisers, Princeton professor Alan Krueger and Harvard professor Larry Summers, are among many who have concluded than extending benefits increases unemployment.

Krueger, former chair of the Council of Economic Advisers, concluded in a 2010 paper coauthored with Columbia University professor Andreas Mueller that the more generous the unemployment benefits, the less intense the unemployed worker’s job search. "The average unemployed worker in the U.S. devotes about 41 minutes to job search on weekdays," according to Krueger and Mueller. Unemployed workers increase the intensity of their job search before their benefits will be terminated.

This finding is not new. Back in 1999, Summers wrote, "Each unemployed person has a 'reservation wage'—the minimum wage he or she insists on getting before accepting a job. Unemployment insurance and other social assistance programs increase [the] reservation wage, causing an unemployed person to remain unemployed longer."

In a study on the effects of unemployment insurance (UI) published in November 2012, the Congressional Budget Office wrote, "The UI system reduces the incentive for benefit recipients to accept a job offer because the earnings from that job will be partially offset by the discontinuation of their UI benefits."

Of course, many factors determine unemployment in a state, and the duration of unemployment benefits is just one of those factors. For instance, North Carolina just had the largest tax cut in its history. But it is impossible to look at the success of North Carolina and conclude that the decision to reduce unemployment benefits harmed its economy.

Original Source: http://www.politico.com/magazine/story/2014/01/north-carolina-cut-jobless-benefits-and-the-sky-didnt-fall-102048.html

 

 
 
 

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