Pethokoukis, Economics, U.S. Economy

What does North Carolina’s big cut in jobless benefits really prove?

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Earlier this year, as The New York Times reported, the North Carolina legislature cut unemployment benefits, reducing (a) the maximum payout by a third and (b) the number of weeks residents can receive jobless aid. As a result, starting in July the state lost its eligibility for the federal Emergency Unemployment Compensation program. (This is the extended benefits program scheduled to expire nationally at year end.)

So how’s that worked out in the Tar Heel State?

Well, if you listen to Republicans, it’s worked out pretty well. The state’s unemployment rate has dropped to 8.0% in October from 8.8% in June. So clearly cutting jobless benefits creates jobs and gets residents back in the workforce, right?

When you dig a bit deeper, things look less bright.

1.) In June, the month before benefits were cut, there were 416,314 residents classified as unemployed. In October, there were 371,756. That’s a decline in unemployment of 44,558.

2.) Over that same period, the number of employed residents only rose by 1,902 from 4,292,251 to 4,294,153. So what happened to those 42,656 residents who left unemployment but did not move to employment?

3.) The state’s labor force participation rate tells the story. It plunged from 62.2% in June, before the benefits cut, to 61.4% in October. If that rate had merely stayed steady, the state’s jobless rate would have increased to 9.1% rather than sharply declining.

In other words, it looks like the cut in unemployment benefits moved people out of the labor force rather than into employment. Likewise, the state employment rate — the share of adults with jobs — declined from 56.7% in June to 56.5% in October. Did reducing the number of North Carolina residents eligible for federal extended unemployment benefits boost employment? These data suggest it did not, a reality Washington policymakers might want to consider.

Update: Bloomberg’s Evan Soltas has noticed the same impact. His conclusion: “Cutting unemployment insurance apparently hasn’t encouraged the unemployed to look harder for work: It has caused them to drop out of the labor force altogether.”

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

14 thoughts on “What does North Carolina’s big cut in jobless benefits really prove?

  1. Maybe I am being too nearsighted here, but that seems pretty counter initiative. How do you just leave the labor force once you have NO income, not even unemployment benefits. In my mind that’s when the sirens and bells and whistles would all start going off and tell me I need to take a job ANYWHERE simply to continue eating, not “meh, well now that my benefits have expired I guess I’m done looking for a job”.

    Maybe everyone is going back to school?

    • When there are no jobs to be had it doesn’t matter how little pay you’ll take or hard you’re looking for a job. Unemployment benefits require you to be job hunting. The definition of in the work force is employed or seeking employment. Without the unemployment benefits, these people now spend their time in food bank lines instead of filling out job application.

  2. One scenario: The wife lost her job at the state DMV office. (Online transactions are creating redundancies in many state offices.) Taxed at the couple’s cumulative marginal rate, and facing extra expenses for day care, she may not find work that pays enough. Another scenario: a construction tradesman has been supplementing UI benefits with off-the-books work while he looks for work. He goes completely underground when benefits end. And another: a 60-year-old gives up and cashes in such retirement savings as he has to stay alive until SS eligibility.

    Some of this explains why northern European countries have lower jobless rates and higher labor force participation rates even though McDonalds workers earn $20/hour. The wife gets childcare. The worker with skills match issues finds work that pays well anyway. Ubiquitous unions protect older workers. Everyone pays higher prices and higher taxes.

  3. When you dig a bit deeper blah blah blah” you get lines like this: “In other words, it looks like the cut in unemployment benefits moved people out of the labor force rather than into employment.“…

    Center on Budget and Policy Priorities, eh?

    There is nothing whatsoever to suggest that…

    Well if the BLS is to be believed it seems that N. Carolina saw an increase of 80,000+ people in the workforce between Oct. of 2012 to Oct. of 2013…

    • Different BLS data sources. Labor force, unemployment rate, employment levels is from the household survey, which is the data source of the blog post. Your source is nonfarm employment from the payroll survey. The 2 data sources doesn’t always track, particularly over shorter horizons.

  4. “The state’s labor force participation rate tells the story. It plunged from 62.2% in June, before the benefits cut, to 61.4% in October. If that rate had merely stayed steady, the state’s jobless rate would have increased to 9.1% rather than sharply declining.”

    Except that the plunge started in January, which is interesting.

    Still, given the increase in the nonfarm payroll, I think it’s difficult to draw conclusions.

    Both the labor force participation and all other numbers show strong NC performance from September 2012 to January 2013, followed by a decline from the January peak until around September 2013. I think it’s a bit much to conclude that a change in July 2013 was responsible.

  5. Isn’t it odd to compare June to July, considering that the peak was in January?

    The bad performance in nonfarm payrolls is from January until July. Performance both before then and afterwards is better. I think it’s difficult to make a conclusion from this.

  6. There’s no real evidence that the end of the unemployment extensions in NC actually forced people out of the workforce. What we do know is that it gave people less incentive to claim that they were in the workforce. I’m a disability attorney. The majority of my clients claim to be in the workforce until their unemployment benefits run out. The real question is whether cutting long term benefits actually discourages workers from looking for work, and there’s really no evidence of that here.

  7. Sorry, but I think you’ve simply gotten wrong. It’s out of character for you. For one thing, you have to look at changes in North Carolina’s labor force participation over time, not just since June, if you want to assess the potential causal relationships between exiting extended benefits and labor market measures. Second, you have to use the most recent data available, November rather than October.

    If you do this, you find that North Carolinians have left the state’s labor force at a slower rate in the five months since end of extended benefits (about 10,000 a month) than they did in the five months before the end of extended benefits (about 13,600 a month). You also see that the number of employed North Carolinians in the household survey rose by 22,251 from June to November. According to the separate (and more reliable) BLS payroll survey, NC gained about 39,000 jobs during the period.

    It is too early to come to any definitive conclusions. Right now, however, what can fairly be said about the preliminary data is that 1) the end of extended benefits had no apparent negative effect on labor-force participation, which was already declining before the change and has since declined at a slower rate; and 2) the end of extended benefits may well have had the result predicted by many labor-market economists: an increase in the propensity of employers to create new jobs and in the propensity of unemployed workers to take them.

  8. Normally, you are data-driven, and indeed you cite some data in your article. Data continues to accumulate, and the WSJ in an editorial today cites December data to reach the opposite conclusion.

    Not an economist myself, I rely partially only on my own instincts and partially on the opinions of those better informed. Will you be revisiting this topic as more data accumulates, or is your opinion written in stone?

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