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To Boost the Economy, Let the Unemployment Bill Die

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To Boost the Economy, Let the Unemployment Bill Die

April 8, 2014

The House of Representatives has the opportunity to stall the economic recovery by following the Senate and passing an extension of unemployment insurance benefits. Or, the House could help the economy by just letting the bill die.

The Senate's timing is extraordinary. On Monday, just three days after Labor Department employment data for March showed that Americans were moving back into the labor force and that the number of long-term unemployed was declining, the Senate passed a bill to extend the duration of unemployment insurance from 26 weeks up to a maximum of 73 weeks. The vote was 59 to 38, with 5 Republican senators joining the Democratic caucus.

The Democratic Senate had been trying to extend the duration of unemployment benefits since they expired in December. While the Senate stalled, the labor force participation rate—the percentage of Americans who are employed or looking for a jobs—rose four tenths of a percentage point between December and March, one of the fastest increases since the beginning of 2010. The number of unemployed out of work for more than 26 weeks declined by 110,000. One of the reasons was undoubtedly the end of emergency unemployment benefits.

The declining labor force participation rate, which stood at 62.8 percent in December, the lowest since 1978, has been a major weakness of the U.S. economy, so the reversal of this trend is cause for celebration, and analysis.

In most recoveries the labor force participation rate eventually turns upward as people reenter the job market and find employment. Following the Great Recession, which was over in June 2009, the upward turn has not happened, and fewer workers mean lower economic growth. It might be happening now, but it is too soon to tell. Three months does not make a trend, even for economists.

Still, the data fit the theory. In a study on the effects of unemployment insurance published in November 2012, the Congressional Budget Office wrote, "The UI system reduces the incentive for benefit recipients to accept a job offer because the earnings from that job will be partially offset by the discontinuation of their UI benefits."

Academic economists with views as diverse as Harvard professor Lawrence Summers and University of Chicago professor Casey Mulligan generally agree that the higher the level of unemployment benefits, and the longer their duration, the longer the unemployed delay taking another job.

To take just one example out of many, Princeton economist Alan Krueger, former chairman of President Obama's Council of Economic Advisers, concluded in a 2010 paper coauthored with Columbia University professor Andreas Mueller that more generous unemployment benefits are associated with lower levels of job search. Unemployed workers increase the intensity of their job search before their benefits will be terminated, the economists found.

It will take more than three months to see if Alan Krueger is right, but so far the empirical evidence is leaning in his direction.

Krueger's theory fits the facts on the ground in North Carolina, where Governor Pat McCrory lowered the duration of unemployment benefits from 63 weeks to 19 weeks last June. Between June and February, the North Carolina economy created 51,000 jobs, far more than neighboring South Carolina, Tennessee, Virginia, and Georgia.

Speaking on April 3 at a General Electric conference in Washington D.C. on the future of work, Governor McCrory described his rationale for lowering the duration of benefits. The money for extended unemployment benefits does not come free from the federal government, but is borrowed and has to be repaid, he told the audience. Last summer North Carolina was $2.5 billion in debt, and could not afford to borrow any more.

Plus, McCrory said, there were jobs going unfilled in North Carolina. With annual unemployment benefits of $20,000, and unreported income of another $10,000, many people found it worthwhile to turn down jobs that paid $28,000.

Many factors determine employment in a state, and the duration of unemployment benefits is just one of them. But it is striking that in the Tar Heel State in September, three months after the duration of unemployment benefits was reduced, the number of employed was higher than in June.

And in the United States, three months after the average duration of benefits in most states declined from 53 weeks to 26 weeks, the labor force participation rate rose, the percent of the unemployed out of work for six months or longer declined, and the economy created 192,000 jobs.

University of Chicago professor Casey Mulligan wrote a book called The Redistribution Recession describing how entitlements trapped people into unemployment. When the unemployed took jobs, the loss of unemployment insurance, food stamps, Medicaid, and housing vouchers resulted in an effective marginal tax rate of 40 percent to 60 percent among low-income Americans. In other words, for every dollar the newly-employed could earn, they would lose 40 cents to 60 cents in benefits. Naturally, many decided to stay unemployed.

If the rise in the labor force participation rate continues it will be a positive force for economic growth, a welcome reversal of a trend. The House would do better to leave the maximum duration of unemployment benefits at 26 weeks rather than passing the Senate's bill to extend them.


Diana Furchtgott-Roth is a contributing editor at RealClearMarkets.  A former chief economist at the U.S. Department of Labor, she directs at the Manhattan Institute where she is a senior fellow. Follow her on Twitter: @FurchtgottRoth.   

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