Bloomberg News

End of Extended Benefits May Lower U.S. Jobless Rate: Economy

May 21, 2012

Job seekers in New York. Photographer: Justin Sullivan/Getty Images

Job seekers in New York. Photographer: Justin Sullivan/Getty Images

The declining U.S. jobless rate may soon get another push downward as Americans lose extended unemployment benefits.

From April 7 through May 12, about 370,000 Americans in 23 states stopped getting the benefits, which provide payments for as long as 99 weeks, according to estimates from the National Employment Law Project. People in the remaining six states and the District of Columbia who still qualify may lose eligibility by September, bringing the program to an end, the report showed.

Some recipients who lose their benefits may decide to accept jobs they view as less than ideal. Others may give up looking for work and drop out of the labor force, eliminating them from the ranks of the jobless. Those outcomes may trim the unemployment rate by 0.1 percentage point to 0.2 point in the next few months, according to economists Dean Maki at Barclays and Michael Feroli at JPMorgan Chase & Co.

“The unemployment rate would be the place where the effect is likely to show up most,” said Maki, chief U.S. economist at Barclays in New York and a former economist at the Federal Reserve. “It may put some modest downward pressure” on the jobless rate.

People may also curtail their spending once they lose this source of income, resulting in slower economic growth that weighs on hiring. Taking these people into account, Maki estimates the drop in unemployment may be closer to 0.1 point. Those continuing to search for a job after payments expire will still be counted among the unemployed.

Losing Eligibility

Not all states were eligible for the federally funded program. For a state to qualify, unemployment over any three- month period must average at least 10 percent more than the same period in any of the previous three years. The reason so many states have lost their eligibility is that their jobless rates have come down enough to push them out of the program.

California, Florida, Illinois, Texas were among the eight states that no longer qualified as of May 12, according to the NELP study. New York will probably lose its eligibility in June and New Jersey may follow a month later.

Damian Zuniga is among those in California who is taking any opportunity that comes along. He lost his job cleaning swimming pools at his cousin’s company in the fall of 2010, and his $445-a-week unemployment insurance payments ran out on March 10. The San Francisco resident, who served in Operation Desert Storm in Iraq in 1990, is living with a friend and is behind on child support for his daughter.

Temp Agencies

After exhausting his benefits, he signed up with four temporary-help agencies, and has been falling in and out of the ranks of the unemployed because the two jobs he got in March and April didn’t last. He accepted doing “the kind of work I did 15 years ago when I got out of the military,” and is hoping more temp assignments roll in while he looks for a permanent position.

“I had to take something,” said Zuniga, 44. “It’s frustrating when you need to work right now and all you can do is play the waiting game.”

A drop in unemployment may help President Barack Obama’s re-election chances in November. Only one president since World War II, Ronald Reagan, has been re-elected with a jobless rate above 6 percent. Reagan won a second term in 1984 with 7.2 percent unemployment in the month of the election, after the rate had fallen almost three percentage points in the previous 18 months.

A declining labor force helped to reduce the unemployment rate by 0.1 point to a three-year low of 8.1 percent in April, according to data from the Labor Department. It has dropped by 0.9 point over 12 months. In order to be counted as jobless and receive government assistance, a person must be in the labor force and actively searching for work.

Maximum Impact

Feroli, chief U.S. economist at JPMorgan in New York, said the maximum effect on the jobless rate is based on one of two extreme scenarios: either everyone who lost extended benefits in April and May takes any job that comes along, or they all exit the labor force.

“Then we’re talking about a 0.2-point reduction in the unemployment rate,” he said. “It is not nothing.”

The drop “could be spread out over May, June and possibly July,” said Feroli, a former Fed economist. The end of extended benefits “could cut all sorts of ways,” so the “net result is open to debate,” he said. Still, “the most high-profile impact would be on the unemployment rate.”

Fed Discussions

A drop in the number of benefits recipients may also figure in Fed discussions on the most effective policy prescription. Federal Reserve Bank of Richmond President Jeffrey Lacker, who projects the Fed will need to raise interest rates before late 2014, is among those who say extended benefits have kept unemployment higher than it would have been.

“As beneficial as such insurance programs can be, they also can affect the incentives to look for work or accept employment offers,” Lacker said this month during a speech in Greensboro, North Carolina. “Thus, they may actually increase the unemployment rate and the duration of unemployment,” he said, citing studies that showed anywhere from 0.8 percentage point to 1.7 percentage points of the jump in joblessness may have been caused by the extension of benefits.

Such views contrast with those of policy makers like Chairman Ben S. Bernanke, who has said some of the recent slump in the jobless rate may be reversed as discouraged workers, who have left the labor force and are therefore no longer counted as unemployed, resume the job hunt in an improving economy.

Goldman’s View

Andrew Tilton, a senior economist at Goldman Sachs Group Inc., estimates that the exhaustion of extended benefits in April and May will push the jobless rate down by less than 0.1 point.

“There has been an improvement in the availability of jobs,” Tilton said. “In a better labor market, people losing their benefits would be more likely to look and to find a job, and less likely to simply drop out.”

Jesse Rothstein, a former chief economist for the Labor Department, is less optimistic. The job market is “roughly stagnating this year,” Rothstein said. “The constraint right now is there aren’t enough jobs.”

For that reason, he is more concerned about the “fiscal multiplier” effect of the loss of benefits, he said. Every dollar of unemployment insurance spending generates about $1.50 of spending, so the expiration of extended benefits this month and last amounts to taking out about $200 million a week from the economy, or $10 billion for the year, he estimated.

“The biggest effect is a lot of people will just have less money,” said Rothstein, associate professor of Public Policy and Economics at the University of California, Berkeley.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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