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Cutting Unemployment Insurance Pushes People Out of the Workforce

Last year North Carolina undertook a radical overhaul of its unemployment insurance system. Among the changes, legislators sharply reduced the amount and length of regular unemployment insurance, cutting the maximum weekly insurance amount by 35 percent and reducing the maximum duration of compensation from 26 weeks to, currently, 17 weeks. By implementing the cuts in weekly benefit amounts in July, North Carolina forfeited  its ability to participate in the federally-funded Emergency Unemployment Compensation program, and consequently, an estimated 70,000 individuals immediately lost long-term unemployment insurance, while another 100,000 individuals who still would have been eligible through the fall saw their insurance lapse  sooner than would have happened.

According to the legislation’s elected supporters, the overhaul was a “difficult decision” needed to fix “a welfare-dependent program” and push unemployed workers to get serious about finding a job–any job.

We’ve now had some time to test this view and the initial results do not look promising for proponents of the cuts. The statewide unemployment rate has in fact fallen sharply since the cuts were implemented, dropping from 8.8 percent in June to 6.9 percent in December.

This drop, however, did not come about because people rushed out and found jobs. Employment as measured by the household survey used to determine the unemployment rate rose by 41,364 persons (1 percent) between June and December, far too little to explain the sharp drop in the unemployment rate. According to the household survey, only 13,414 more persons (0.3 percent) were at work in December 2013 compared to a year earlier.

If people weren’t finding jobs, then why did the unemployment rate fall? It turns out that the legislature’s prescription for lowering the unemployment rate worked through a different channel. Fifty-two thousand people were reported as “leaving the labor force” between June and December, meaning that they were no longer employed nor actively seeking work. In fact, North Carolina ended 2013 with a labor force that had 111,000 fewer participants (-2.3 percent) than was the case a year earlier.

For statistical purposes, workers are unemployed if they report that they lack a job, are available for work, and are actively seeking work. Anyone receiving unemployment insurance must be seeking work to continue to draw insurance. It appears that many of the people who had their insurance terminated  simply stopped looking for work, so they are no longer counted as being unemployed.

This outcome is not actually surprising given the economic research on this topic. Economists at both the Federal Reserve Bank of San Francisco and the University of California, Berkeley have found that the overwhelming majority of people who saw their insurance payments end simply stopped seeking work. In other words, unemployment insurance kept these people in the labor force.

Some supporters of the insurance cuts have pointed to a separate survey of establishments conducted by the U.S. Bureau of Labor Statistics that shows some uptick in the pace of job growth in the months following the changes. In this survey, the state netted 51,400 payroll jobs between June and December. And North Carolina ended 2013 with 64,500 more jobs (1.6 percent) than it had a year earlier.

On closer examination, these numbers really don’t provide much evidence that the cuts to the insurance system spurred job growth. During 2013, North Carolina gained jobs at an average monthly rate of 0.1 percent, compared to a rate of 0.2 percent during 2012 and no different from the 0.1 percent average monthly rate recorded in both 2010 and 2011. Between June and December of 2013, the state netted an average of 5,400 jobs per month, compared to 7,500 jobs per month in 2012. North Carolina’s problem therefore remains the same as it has been for several years: an anemic recovery.

In short, if the point of cutting unemployment insurance compensation was to get people back to work and spark job growth, North Carolina’s policy choice appears, at first glance, to be a failure. If the point was to push people out of the labor force, it appears to be working.

John Quinterno is the founder and principal of South by North Strategies, Ltd. in Chapel Hill and is the author of “Running the Numbers: A Practical Guide to Regional Economic and Social Analysis.” 

Dean Baker is a co-director of the Center for Economic and Policy Research in the District of Columbia and is an author of “Getting Back to Full Employment: A Better Bargain for Working People.”

This column originally appeared in the News Observer.

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