Expiring jobless benefits to lower U.S. unemployment rate

Reuters

By Lucia Mutikani

WASHINGTON, Dec 3 (Reuters) - The U.S. unemployment ratecould fall substantially early next year as belt-tightening inWashington throws more than a million long-term unemployedAmericans off the benefit rolls.

The loss of benefits could spur former recipients to eitherdrop out of the labor force or accept jobs they previously wouldnot have considered. Some economists estimate this could lowerthe current unemployment rate of 7.3 percent by as much as halfa percentage point.

"The lapsing of the program could lower the unemploymentrate by perhaps 0.25-0.50 percentage point, with much of theeffect coming through reduced labor force participation, ratherthan increased employment," said Michael Feroli, an economist atJPMorgan in New York.

To receive jobless benefits, Americans are required to beactively looking for work. That is also a key factor thatdefines who is unemployed, as opposed to those who have droppedout of the labor force.

Emergency jobless benefits for 1.3 million long-termunemployed people are set to run out on Jan. 1 unless the U.S.Congress agrees on an extension.

The National Employment Law Project, a New York-basedadvocacy group, estimates that about 850,000 people will run outof state unemployment benefits in the first quarter of 2014,with no access to emergency benefits if lawmakers do not act.

The emergency unemployment compensation program wasintroduced in 2008 during the depths of recession, and has beenextended every year since then. It has paid out more than $225billion to cushion the long-term unemployed as the economystruggled to heal from the recession.

The nonpartisan Congressional Budget Office said on Tuesdayextending the program for another year would increase employmentby 200,000 by the end of the fourth quarter of 2014 and add 0.2percentage point to gross domestic product.

The CBO was responding to a letter from a Democrat lawmaker,Chris Van Hollen, asking for an assessment of the program'simpact on the economy. The CBO also noted that extending theprogram would increase the federal government debt.

President Barack Obama and his fellow Democrats want toinclude an extension of the program in any budget deal hammeredout by a bipartisan panel. A negotiating panel has been given aDec. 13 deadline to reach a deal to fund the government.

With little time left, and given opposition to an extensionamong some Republicans, analysts say it appears likely theemergency benefits will expire as scheduled on Jan. 1.

HEADACHE FOR FED

The U.S. jobless rate has dropped 2.7 percentage points froma peak of 10 percent in October 2009, though some of the declinehas been due to Americans giving up the search for work.

Goldman Sachs expects an expiration of emergency benefitswould reduce the jobless rate by between 0.1 and 0.2 percentagepoint in early 2014.

"If, hypothetically, all workers receiving emergencyunemployment benefits dropped out of the labor force oncebenefits expired, this would result in a 0.8 percentage pointdecline in the unemployment rate," said Alec Phillips, aneconomist at Goldman Sachs in Washington.

"If all of these workers became employed, the resultingunemployment rate would be only slightly lower. However ... wewould expect the actual effect on the unemployment rate to besignificantly less dramatic than either of these hypotheticals."

Should the unemployment rate drop because former recipientsof jobless benefits have dropped out of the labor force, thatcould pose problems for the Federal Reserve, which has put the unemployment rate at the center of monetary policy.

The Fed has said it will hold interest rates near zero atleast until the jobless rate drops to 6.5 percent. But if a bigpart of the decline reflects people dropping out of the laborforce, that could be seen as a sign of weakness, not strength.

"Such a fall in the unemployment and participation ratescould create some tricky choices for Fed policymakers as theyassess the health of the labor market," said JPMorgan's Feroli.

Not only will the expiration of emergency benefits affectthe unemployment rate, it could also hit consumer spending andultimately economic growth in the first quarter of 2014.

"The program currently pays out benefits at around a $20-25 billion annual rate," said Feroli. "Should that flow dry up,consumer spending could take a hit in the first quarter, perhapssubtracting around 0.4 percentage point from annualized real GDPgrowth in that quarter."

View Comments (433)