Bloomberg News

Unemployment Benefit Cut Adds to Drag on U.S. Spending: Economy

May 06, 2013

Job Openings in the U.S. Decrease

Job seekers fill out applications during the NYC Restaurant Job Expo at the Gabarron Foundation in New York. Photographer: Peter Foley/Bloomberg

Dentral Smith had to say no when her granddaughter asked for a treat on the way home from school. The government’s cut in unemployment payments leaves her with less spending money.

“It was a setback,” said Smith, a 45-year-old Philadelphian who has been out of work since November. “My granddaughter, she said ‘Nanna, you’ve got your wallet.’ And I said, ‘Yeah, there’s nothing in it.’”

Federally funded benefits paid to the long-term unemployed were lowered by 10.7 percent starting March 31 as part of reductions to planned government spending called sequestration. Benefit cuts will affect about 1.8 million workers, based on Labor Department data, and add to the drag on consumer spending from a payroll tax increase that took effect in January.

The reductions will shave about $2.4 billion from the unemployment trust fund this fiscal year, according to an Office of Management and Budget report. While that’s not enough to have a measurable impact on $11 trillion in annual consumer spending nationwide, the effect will be magnified in places with large numbers of long-term unemployed and in states with generous programs, such as Hawaii.

“The impact is going to be felt more severely in states that pay adequate benefits,” said Maurice Emsellem, policy co- director at the New York-based National Employment Law Project, which advocates for issues including economic security for low- wage workers and the unemployed. The cuts will mean “there is less money circulating in the economy. Folks spend every dime of their benefit.”

Highest Stakes

States with the most at stake include Alaska, California, Connecticut, Michigan and New Jersey, all with 2 percent or more of their labor forces on long-term benefit, according to a Pew Charitable Trusts analysis. Those five states together accounted for $2.75 trillion in gross domestic product in 2011, or 21 percent of the U.S. total, according to data compiled by Bloomberg.

Pennsylvania, with 1.8 percent of its workforce receiving extended benefits, has already started sending smaller checks to people like Smith. Administrative issues are stalling implementation of the cuts in most other states.

Consumers are also feeling the pinch of a higher payroll tax rate after the levy that funds Social Security reverted in January to its 2010 level of 6.2 percent from 4.2 percent. For households earning $50,000 a year, that translates to about $80 less a month in disposable income.

Consumer Spending

That’s taking a toll on the consumer spending that accounts for about 70 percent of the economy. Personal spending cooled in March after the strongest gain in five months, Commerce Department data showed. Purchases advanced 0.2 percent compared with a 0.7 percent increase in the prior month.

Mark Zandi, chief economist at Moody’s Analytics in West Chester, Pennsylvania, said because households quickly spend their benefits checks, the multiplier effect that money has on GDP one year after a policy change is around 1.5. Because of that, cuts to unemployment insurance have a larger impact on the economy than the official dollar loss suggests.

“If you cut unemployment insurance, then the economic impact is outsized,” Zandi said. “This is not a lot of money in the great scheme of things. When you combine it with all of the other cuts and the higher taxes, it’s going to have an impact.”

Fed’s Statement

The Federal Reserve said May 1 that fiscal policy has been restraining U.S. economic growth and said it is prepared to increase purchases of securities if necessary to stimulate job creation.

So far, investors have signaled little concern that sequestration will be a drag on growth. Stock indexes are near record highs, with the Dow Jones Industrial Average crossing 15,000 for the first time last week, while the Standard & Poor’s 500 (SPX) Index closed above 1,600, also a first, on May 3. The U.S. dollar index is up 3 percent for the year.

Stocks were little changed today in the U.S. In Europe, reports today showed euro-area services and manufacturing output shrank for a 15th straight month in April and retail sales fell in March as the 17-nation economy struggled to emerge from recession.

The sequestration cuts affect federally funded benefits, known as Emergency Unemployment Compensation, that kick in for people out of work more than 26 weeks, when state benefits typically run out. About 15 percent of unemployed workers receive fully federally funded benefits, according to the Pew study.

Economic Downturn

The EUC program was enacted in 2008 as unemployment was rising amid the deepest economic downturn since the Great Depression. Congress has renewed it since, most recently extending it through 2013.

Americans can now receive 14 to 47 additional weeks of emergency benefits, with duration tied to state unemployment levels. The amount an individual is paid depends on prior earnings, length of employment and state policies.

Consumption in states with higher payments will take a greater hit from reduced emergency benefits, Emsellem said. In Hawaii, for instance, benefits average $10.76 per hour assuming a 40-hour week, according to data compiled by Bloomberg. In Alabama, average pay is $5.11 hourly.

Lower-Paying Jobs

Unemployment insurance reductions could also force people to settle for lower-paying jobs rather than holding out for perfect positions. While that could help lower the jobless rate, which stood at 7.5 percent in April, it also can leave valuable job skills to atrophy.

The U.S. economy added 165,000 jobs in April, up from 138,000 in March, the Labor Department reported last week. Still, 11.7 million Americans were jobless in April, compared with 6.8 million in May 2007, before the last recession began.

The number of long-term unemployed, or those out of work for 27 weeks or more, declined by 258,000 to 4.4 million in April. The group accounts for 37 percent of unemployed workers, Labor Department figures show.

People try harder to find jobs when benefit payments are smaller, studies have shown. A 2008 analysis by Alan Krueger, now chairman of President Barack Obama’s Council of Economic Advisers, and Andreas Mueller, then a Stockholm University economist, found that “across the 50 states and D.C., job search is inversely related to the generosity of unemployment benefits.”

Desperation’s Impact

John Dodds, who works with job seekers at the nonprofit Philadelphia Unemployment Project, said benefit reductions could cause some of the long-term unemployed using his service to settle for low-paying jobs more easily. That’s not ideal, he said.

“It’s not like people can afford to work at minimum wage, but at some point desperation sets in,” he said. “It’s better if people use the skills they’ve been trained for.”

In any case there aren’t enough openings in Philadelphia for everyone who needs a job, Dodds said. Philadelphia County’s unemployment rate hung at 10.6 percent at the end of 2012.

In California, the reductions will affect about 400,000 people, and because their implementation was delayed until April 28, benefit cuts will total a steeper 18 percent for the rest of fiscal 2013.

That will mean about $54 less from the average $298.87 weekly unemployment allotment in California, according to Bloomberg calculations based on U.S. Labor Department data.

Smith, the jobless grandmother, said while the cuts to her benefits are spurring her to watch her spending, she isn’t settling for a job yet. Living with her pregnant daughter, she benefits from a temporary cushion because she pays no rent.

“I’m not as selective, but I am selective,” she said. “It’s kind of hit me hard. It’s a whole lot gone.”

To contact the reporter on this story: Jeanna Smialek in Washington at jsmialek1@bloomberg.net

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


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