North Carolina’s Failed Experiment in Cutting Unemployment Benefits

I don’t usually associate the American Enterprise Institute with compassion for the unemployed or anything, really, other than pro-business, anti-government policy prescriptions and rhetoric. So I was surprised and heartened by a thoughtful post by AEI Money & Politics blogger James Pethokoukis, who skewers the notion that cutting unemployment benefits will spur job creation.

Pethokoukis analyzes the effect of reductions in weekly benefit levels and total weeks of unemployment compensation enacted in North Carolina this summer—cuts so draconian they led to the state being kicked out of the federal Emergency Unemployment Compensation program that provides weekly benefits to long-term jobless workers. North Carolina Republicans claimed the cuts would force lazy workers to find jobs, thereby solving the state’s unemployment crisis.

Instead, as Pethokoukis shows, tens of thousands of North Carolinians stopped looking for jobs that weren’t there once they were cut off from weekly benefits (which are only paid to people who are actively seeking paid employment). The labor force participation rate fell nearly a full percentage point, as 42,656 workers gave up looking and dropped out of the labor force. If they hadn’t, according to Pethokoukis, “the state’s jobless rate would have increased to 9.1% rather than sharply declining.” University of California at Berkley economist Jesse Rothstein predicted this dropout effect in a 2011 paper he presented at EPI, which disputed the notion that unemployment insurance causes significant unemployment.

Hopefully, the North Carolina experience will help persuade House Republicans like Dave Camp to stop arguing that killing the EUC program will boost employment. As EPI and the CBO have shown, paying out $25 billion in EUC in 2014 will help the economy, not hurt it. Killing the program won’t help a single unemployed person find work, but will instead depress aggregate consumer demand and cost the economy 310,000 jobs.

  • BobHarrer,sr

    W are just stubborn and heartless. They cut food stamps because they do not want to have them. Cutting unemployment benefits, actually lowers the economy, jobs are affected because nobody will look. After the public voted the GOP in , now you see the harm the REPUBLICANS have done. Next election, be careful who you vote for . Opinion of RNH

  • benleet

    National labor participation rate today stands at 63.0%, last seen in April 1978. If it drops by 1%, as it did in N.C., then it equals 1977 level. Since Jan 2007 it has fallen by 3.4%, equal to 8.36 million workers who are not counted as unemployed. Count them the and unemployment rate reaches 11.7%.

  • benleet

    We end up with 5.5% unemployment if conveniently 1% the labor force decides to stop participating and all that 1% are unemployed individuals. The arithmetic is a little complex, but not difficult. Then we are back to normal, no? This is indicate a big improvement. If we live in 1977 land, yes. I used this bls site for the details — — you reduce # unemployed by 1% of “working age population” and reduce labor force by same amount, then divide for ratio. The number with jobs remains constant, or you can drop it by 310,000, that might bring up the unemployment rate a smidge.

  • benleet

    I made a mistake, in public, and that last comment should read that the unemployment rate will drop to 6.4%, not 5.5%. That is if immediately 1.3 million unemployed dropped out of the labor force and 310,000 became unemployed as a result of the $25 billion being withdrawn from consumption. I hope I got that right. But it still is true that simply eliminating the benefit checks does nothing to improve the state of the economy, makes it worse in fact, and that makes it appear to improve, a dropping the U3 unemployment rate.

  • manure2

    I absolutely believe in a cushion to pay for unemployment expenses. This is called a rainy day fund. If fools do not save any money, they are not functioning adults and whatever happens to them is unavoidable. People showing “sympathy” by handing out other people’s money does not impress me.