Unemployment benefits will soon expire for 1.3 million workers. Where will they go?

December 2, 2013

Our story so far: Some 1.3 million out-of-work Americans will lose their unemployment insurance unless Congress extends an emergency aid program that's set to expire Dec. 28. (Another 800,000 or so workers will fall out of the program in the months after.)

(Photo by Joe Raedle/Getty Images)
(Photo by Joe Raedle/Getty Images)

So, what will happen to all those workers? There's a real possibility they will just drop out of the labor force entirely.

That's the conclusion of a new research note from JP Morgan chief economist Michael Feroli, who argues that many of those 1.3 million workers may simply give up looking for jobs once their benefits lapse. That, in turn, could reduce the "official" U.S. unemployment rate by between 0.25 and 0.5 percentage points. But it won't mean the economy is getting any better.

A quick refresher: In normal periods, states offer unemployment insurance to laid-off workers for a maximum of 26 weeks. During the last recession, however, Congress passed an "emergency" program that provided four "tiers" of extended benefits for a maximum of 99 weeks. That program has injected about $225 billion into the economy all told. It has also been shrinking slowly over time as the economy recovers:

unemployment tiers

Come Dec. 28, however, those emergency programs will disappear entirely unless Congress renews them. About 1.3 million people will lose their benefits immediately, and another 800,000 or so will see their benefits lapse in the first few months of 2014.

Feroli reviews various economic research from the Federal Reserve System on the effects of unemployment insurance. On average, studies find that the presence of jobless insurance has raised the official unemployment rate by about 1 percent. The main reason? People have to keep looking for work in order to qualify for benefits, which means they stay in the labor force. (The jobless benefits may also dissuade people from getting lower-paying jobs, but most studies find that this is a smaller effect.)

By contrast, that research implies, once those benefits expire, many workers may simply stop looking altogether. There are about 4.1 million people in the country who have been unemployed for at least 27 weeks. About one-third of them are scraping by with help from the unemployment-benefit program.

Many of those unemployed workers have an extremely difficult time finding jobs — companies often won't even look at their résumés — and it's unlikely that they'll have better luck once their benefits expire.

long-term unemployment

That means many workers could drop out of the labor force completely and thus won't be included in the "official" unemployment rate, which could fall as much as 0.25 to 0.5 percentage points.

In other words, it will look as if the labor market has improved, even though it hasn't. Indeed, some researchers argue that the expiration of benefits could even hurt the economy further by reducing consumer spending. The Economic Policy Institute estimates that this lapse could whittle 0.2 percentage points off GDP next year.

There's also another twist: This could make the Federal Reserve's job in steering the economy much harder in the months ahead. Here's Feroli: "Setting aside the normative aspect of whether from a public policy perspective this is a desirable or undesirable outcome, such a fall in the unemployment and participation rates could create some tricky choices for Fed policymakers as they assess the health of the labor market."

Further reading:

-- A complete explanation of how and why the unemployment benefits of 2.1 million workers are set to expire early next year.

-- Rep. Sandy Levin (D-Mich.) is trying to pass a one-year extension of the jobless benefits. Here's our Q&A with him on the topic.

-- Study: Companies won’t even look at résumés of the long-term unemployed

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