On July 1, North Carolina pulled the safety net out from under the long-term unemployed. Workers in the state with the nation’s fifth-highest unemployment rate will now be eligible for only 19 weeks of unemployment compensation benefits. This is shortest duration of any state, and is well below even the pre-recession standard of 26 weeks. Furthermore, North Carolina’s politicians have disqualified their own state for over half a billion dollars in free federal unemployment aid—and all because they were determined to slash the weekly benefits provided to the unemployed.
North Carolina’s policymakers have made it clear that they have little empathy for the suffering created by the state’s stagnant labor market, which has left 8.8 percent of its workforce without a job. But if policymakers think that they can further disadvantage job seekers without damaging North Carolina’s prospects for economic recovery, they’re dead wrong. As Paul Krugman writes, the move to slash unemployment benefits is a huge mistake on both humanitarian and economic grounds.
The unemployment benefit slashers demonstrate a fundamental misunderstanding about how aid to the unemployed helps the economy. First and foremost, unemployment assistance helps workers and their families keep their heads above water in the event of a job loss until they can find another job. That’s the “private” benefit. But secondly, there are benefits that we all share when the government assists job seekers. Unemployment compensation is an extremely effective means of economic stimulus, because that compensation puts money directly in the hands of people who are most likely to spend it immediately. That’s the “public” benefit: such spending props up local economies at times (like now!) when the economy is suffering from a massive shortfall in aggregate demand.
These public and private benefits provide more than enough reason for policymakers to ramp up unemployment assistance in a weak labor market, rather than scaling it back. In fact, under current economic conditions, the large multiplier effects of unemployment compensation may actually mean that such spending is debt-reducing in the long term.
“Slashers” preach that cutting unemployment benefits will magically push the unemployed to find jobs more quickly, but that simply isn’t possible in an ailing economy, when there are so few available jobs per job seeker. Instead, “slashers” may be pushing these individuals out of the labor market altogether. Examining data from the Great Recession and subsequent recovery, economists Jesse Rothstein (pdf) and Henry Farber and Robert Valletta (pdf) confirm that extending unemployment benefits slightly lengthened the duration of unemployment during that period. But they find little evidence that this is due to reduced job-seeking effort on the part of recipients. Rather, the authors attribute at least half of this effect to continued labor force participation among individuals who otherwise would have dropped out of the job market entirely. Many of those who discontinue their job search will join the ranks of America’s “missing workers”: people who are no longer searching for work, but would be if job opportunities were stronger. An extended absence from the job market may significantly reduce future prospects for these men and women even after they resume their search for work, increasing the likelihood that they will experience hardship or poverty in the future. To the extent that extending support to job seekers prevents them from exiting the labor force entirely, unemployment benefits will be money well spent.
Even if policymakers cannot muster compassion for unemployed workers in a stagnant job market, they should at least employ sound economic analysis in decision-making. The North Carolina politicians may be slashing at the unemployed with one hand, and dealing the economy a blow with the other.