If the economy’s still weak, why are states cutting unemployment benefits?

August 7, 2012

The U.S. economy is about to reach a dreary milestone. At the end of this week, not a single state in the country will offer "extended benefits" to unemployed workers. The program, which has long helped Americans who have been out of the job for many months, has been shrinking all year. And, as a result, more than 511,000 unemployed workers have now lost their jobless benefits.

Curiously, states aren't paring back their unemployment programs because the labor market is improving drastically. The national unemployment rate is still an uncomfortably high 8.3 percent. Rather, states are reducing the number of weeks they provide benefits because of the odd structure of the law. The unemployment program wasn't designed to deal with a stagnating labor market of the sort the United States is now stuck in.

Hannah Shaw of the Center on Budget and Policy Priorities (CBPP) explains. Since 1970, states have been able to offer "extended benefits" on top of regular unemployment insurance when times are tough. That's usually an extra 13 or 20 weeks of coverage. And the states typically get matching funds from Congress to do so—right now, thanks to the stimulus bill, the federal government will pick up the entire tab until the end of 2012.

But there's a catch. Under the often-complicated rules, states can only offer extended benefits if their unemployment rate continues to deteriorate year after year. And that's not happening right now. The jobs market isn't getting significantly better. But it's also not getting significantly worse. So many states have to switch off their extended benefits, even though unemployment remains elevated.

Idaho is a case in point, as economist Chad Stone explains. For the past three months, the state has been stuck at 7.7 percent unemployment. That's quite high. But it's not 10 percent higher than at any point in the last three years. And, so, under the rules, Idaho had to pare back its extended benefits program, cutting off an estimated 1,200 people from government support.

Here's a map from CBPP showing the changes in state unemployment insurance benefits as a result:

A state like Florida used to offer up to 99 weeks of coverage. Since May, with the end of its extended benefits program, that's dropped to 73 weeks, even though Florida's jobless rate is still at 8.6 percent. Some 29,600 people have been tossed off the rolls.

And the unemployment-benefit cuts will likely affect a greater number of people as time goes on. All told, some 5.2 million Americans have been out of work for longer than 27 weeks, with a large number of those taking advantage of some form of extended unemployment insurance. And that safety net will shrink even further at the end of 2012, when an additional federal program (known as "Emergency Unemployment Compensation") comes to an end. According to recent central-bank projections (pdf), the U.S. unemployment rate will still hover around 8.1 percent at that point.

 

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Dylan Matthews | August 7, 2012