North Carolina's Failed Ending of Long-Term Unemployment Benefits

I sold it in for my post today and pointed out that the sensible policy is to only cut unemployment benefits when the economy, and the labor market more specifically, has returned to capacity. That's counter-cyclical policy construction 101. In the post, I mused briefly on Ben Howe's method of figuring out whether there are adequate numbers of jobs out there, which consisted of driving about and noticing some help wanted signs. In place of that method, I suggested counting the number of job openings there are.

Howe shot back on the Twitter though, ostensibly commenting on how successful North Carolina's July ending of long-term unemployment benefits has been:

Twitter is a brief medium, so I am not going to grill down too hard on this. But obviously North Carolina unemployment has not declined 8 points since July. It would have an unemployment rate below 1 percent if that were the case. I can't imagine he actually thinks that is true. So he must mean something else.

But what he means is not really important here. Unemployment rates can fall for two reasons: 1) people get hired into jobs, 2) people withdraw from the labor force. Here is a graph of what has been going on in North Carolina since July.

The blue line is the official unemployment rate of North Carolina. You can see that it has fallen, as it has nationally as well. The red line represents the percentage change in employment from the prior year. It takes North Carolina payrolls and divides it by the North Carolina labor force. The green line represents the percentage change in the size of the North Carolina labor force from the prior year. I do changes from prior years in order to offset seasonality.

Basically what you see here is after the NC long-term unemployment benefit cuts came down in July, employment (red line) stayed relatively flat. There is a brief increase and then decrease back down. But the size of the labor force (green line) falls. Which is to say: withdraws from the labor force account for reductions in the unemployment rate. People are not getting into jobs. They are getting out of the labor force. Starving out the long-term unemployed is not causing them to find a big reserve of job openings that Howe spotted in his stroll through Charlotte's window shops.

Of course, this has been the story for North Carolina throughout the recession as Evan Soltas pointed out earlier.

Does it look like the sharp fall in that blue line (unemployment rate) is being driven by a sharp rise in that green line (employment) or by a sharp fall in the red line (labor force)? The answer is obvious: the labor force is shrinking as people give up altogether. If North Carolina can be used as an example for how cuts to long-term unemployment benefits play out in the country as a whole, more misery awaits.

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