North Carolina Test Tube for Unemployment Drag on U.S. Economy

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from Bloomberg Businessweek,

When Congress reconvenes on Jan. 6, one of the first issues it will take up is whether to renew an emergency federal unemployment program that expired on Dec. 28, cutting off 1.3 million jobless workers.

How will these workers fare? One place to look for answers is North Carolina. 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.

In essence, the state’s experience over the last six months is a harbinger of what may be in store for the rest of the country.

“This doesn’t have to be a thought experiment, because you can just look at what’s happened in North Carolina,” says Aaron Chatterji, an economist at Duke University’s Fuqua School of Business. “The 1.3 million people losing their benefits are going to be in the same position as the 170,000 people here who have lost theirs.”

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.

“Year over year, the number of employed people in North Carolina ticked up by 6,082, while the unemployed fell by 101,901. That means the labor force contracted by 95,009. So the improvement has not necessarily been driven by more people going to work and is actually being driven to a large degree by people leaving the labor force.”

In October the state’s labor force participation rate hit a 37-year low. One benefit of unemployment insurance is that “it has an anchoring effect,” says Quinterno, “because you have to be looking for work” to qualify for benefits.

Economic research has shown that some job seekers do become less selective about the jobs they’re willing to take once their unemployment insurance expires — the so-called “employment effect.”

There’s evidence this may be occurring in North Carolina. A Dec. 20 note from JPMorgan Chase & Co. (JPM:US)’s chief U.S. economist, Michael Feroli, pointed out that the state’s employment growth has outpaced national growth since July.

Yet he also noted that labor-force participation has fallen much faster than it has nationally.

It’s hard to draw firm conclusions from limited data. Still, … “the Tar Heel test tube,” as Feroli has dubbed it, is worth paying attention to. Says Chatterji: “The statistics are so dramatic.”

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