What happens when jobless benefits get cut? Let’s ask North Carolina.

January 24

This month, some 1.6 million Americans have lost their unemployment insurance after an emergency federal program to help the jobless expired. So what will happen to those workers? Will they find jobs? Or will they just drop out of the labor force altogether?

Lawmakers in North Carolina (Takaaki Iwabu/AP)
Lawmakers in North Carolina (Takaaki Iwabu/AP)

Some potential clues come from North Carolina, which effectively withdrew from the federal unemployment insurance program back in July 2013. As a result, the state went from offering up to 73 weeks of jobless benefits down to just 20 weeks — the lowest in the country.

So what happened in North Carolina? As it turns out, the data is still fairly ambiguous and there are two conflicting interpretations here:

1) Many workers may have dropped out of the labor force. Everyone agrees that North Carolina's unemployment rate kept dropping, much as it did in the rest of the country, after benefits got cut.

But that might have been a bad omen: According to data from the Bureau of Labor Statistics, the number of people in the labor force has plummeted in North Carolina since last summer (even as it rebounded slightly in the rest of the nations):

The charts above suggest two things, as Annie Lowrey reports in The New York Times. First, some people who saw their jobless benefits lapse may well have found jobs — perhaps they decided to take a lower-paying gig than they otherwise would have, out of desperation. But a greater number of workers appeared to have simply given up looking altogether, possibly because jobs are still extremely difficult to come by, and they no longer have to keep searching to qualify for benefits.

2) ...or perhaps employment actually increased. Yet other data sets seem to tell a different tale. A more optimistic view of what happened in North Carolina comes from a new paper (pdf) led by Marcus Hagedorn of the University of Oslo. He and his three co-authors sifted through the Census Bureau's "household survey" and the "establishment survey" for the same period. And the results were surprising.

What they found is that overall employment has actually gone up in North Carolina since benefits got cut in June of 2013. The household survey in particular showed an increase in both employment and labor force participation. But both surveys suggested that North Carolina's labor force is growing, not shrinking:

labor force north carolina

Hagedorn's paper suggests that, by and large, workers in North Carolina do seem to be finding jobs ever since unemployment insurance got cut. And it's not clear that these are lesser jobs or lower-paying jobs: The data suggests that overall hours in North Carolina went up, and there was little change in wages and earnings.

So who's right? These are obviously two contrasting views about what happened to North Carolina's labor force, based on seemingly conflicting data sets. In their paper, Hagedorn and his co-authors wrote, "We could not establish the reasons for this discrepancy based on our conversations with the BLS."

Perhaps the data's just noisy, and it's way too early to draw any broad conclusions from a half-year's worth of numbers in a single state. Indeed, Hagedorn and his co-authors explicitly emphasize caution: "Only a few months of data are available and sample sizes available in most data sets are too small to yield reliable predictions of month to month changes in variables such as employment, unemployment, etc. So the evidence provided below should be interpreted with extreme caution." (See Dean Baker for more on this.)

The authors also note that it's hard to tease out the effects of slashing jobless benefits from other things that may be going on in North Carolina, like weather, migration, demographics, or even the decisions of large employers. Their paper doesn't do that/

The broader debate on unemployment benefits: North Carolina's experience touches on a long-standing economic discussion about the effect of unemployment insurance  —  one that's now spilling over into Congress. Let's quickly rehash that debate for context.

The view that extended jobless benefits are helpful during a severe recession. One mainstream view is that cutting unemployment benefits during a recession doesn't actually spur people to find jobs. After all, jobs have been very scarce these past few years. Even today, there are still three workers seeking work for every one job opening. People can't find jobs if there aren't jobs to be found.

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

That's why many economists think that unemployment insurance isn't really discouraging workers from getting jobs right now. For instance, the University of California, Berkeley's Jesse Rothstein has estimated that the expansion of jobless benefits only added 0.1 to 0.5 percentage points to the unemployment rate in late 2010. JPMorgan's Michael Feroli has rounded up a variety of studies that come to a similar conclusion.

Those studies imply that workers won't magically find jobs if their unemployment insurance gets cut. Instead, many workers may stop looking for work — possibly because they no longer have to keep searching to qualify for benefits. The BLS numbers on North Carolina seem to support this story.

The view that jobless benefits are causing problems. Hagedorn, however, has dissented from this mainstream view. In October, he released a paper (pdf) with three co-authors suggesting that the expanded unemployment insurance program was actually responsible for much of the rise in joblessness during the Recession. Importantly, that paper doesn't argue that jobless benefits discourage workers from looking for jobs. (They find that this effect is small, just like Rothstein did.) Instead, his model suggested that the unemployment program raised costs for employers, who saw a drop in profits and, in turn, are less likely to offer jobs.

By extension, this paper suggests that cutting unemployment insurance might be a good thing — it would boost incentives for hiring. The Census's establishment survey numbers on North Carolina seem to support this story.

Others remain skeptical of Hagedorn's argument. As Chad Stone of the Center on Budget and Policy Priorities explained in this critique last fall, the paper relies on a very different model of how the U.S. economy acts during the recession — namely, one in which insufficient demand from consumers for goods and services isn't the economy's main problem. Stone argues that this model gets cause and effect backwards: Businesses aren't hiring because there's not enough consumer demand, which is why we had extended jobless benefits. Not the other way around.

So the North Carolina case is worth watching closely, in part because it speaks to this debate directly. "The consensus view right now is that when unemployment insurance ends, the unemployment rate will go down because people will drop out of the labor force rather than getting jobs," says Stone. "Now, if this [i.e., the new North Carolina data in Hagedorn's latest paper] turns out to robust and believable, it would raise questions about that."

Further reading:

-- Our full explainer on why unemployment benefits for 1.3 million people got cut this month.

-- Seven reasons why long-term unemployment in the United States is a disaster.

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