Bloomberg Businessweek

How Killing Unemployment Benefits Could Kill Economic Growth

On Jan. 10, the monthly jobs report showed that the U.S. economy added only 74,000 jobs in December—and that people were giving up on finding employment and leaving the work force in droves. (That’s why the unemployment rate fell to 6.7 percent; you have to be looking for a job to count as unemployed.) Then, last Tuesday, the Senate voted down two proposals to revive federal emergency employment compensation (EUC) for 1.3 million jobless workers that expired in late December. Cutting off these people, and the millions more who would have relied on the program this year, is almost certain to exacerbate the negative trend of people leaving the labor force that stood out in Friday’s jobs report.

In fact, it’s already happening. Last June, North Carolina cut off federal unemployment benefits to its workers (for reasons I explained here). As the only state to do so, North Carolina is a harbinger of what could happen nationally, now that the program has ended and appears unlikely to be revived. This chart, from John Quinterno of the Chapel Hill, N.C., economic research firm South by North Strategies, shows what happened to the state’s labor force before and after this change:

South by Northwest Strategies

The graph shows the monthly percentage change in the size of North Carolina’s labor force, seasonally adjusted, year over year. So what you’re seeing on the left side of the chart is positive rates of growth during the first five months of the year: North Carolina’s labor force was larger in the early months of 2013 than it had been in 2012. But that growth rate slowed and—after the state cut off benefits in June—turned negative. Through the rest of last year, that negative trend intensified as people dropped out and the labor force got smaller.

Why would jobless workers quit looking for work when their unemployment benefits run out? Well, one benefit of federal EUC is that it requires recipients to be actively looking for work. When it is cut off, many give up because the labor market is still very weak and there aren’t jobs available; the U.S. counts three available workers for every job opening right now.

If the rest of the country follows the pattern of North Carolina, most of those 1.3 million people will give up looking and fall out of the labor force, squandering a lot of economic potential. That’s bad news for the economy, since, as the chart below shows, the national labor force participation rate has been falling for years:

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