NC Budget and Tax Center

The truth about job creation and unemployment benefit cuts

It’s the myth that will not die.

In the ongoing debate over the impact of last year’s draconian cuts to unemployment benefits, we keep hearing the story that reducing benefits for the jobless has helped reduce the unemployment rate.

If only this were true.

While the unemployment rate has undoubtedly fallen, this is because unemployed workers have simply fallen out of the labor force, rather than moving into employment—a trend the unemployment rate simply doesn’t take into account. Just this point was made yesterday in a New York Times piece by Annie Lowrey profiling North Carolina’s economy, which noted that for every unemployed person who moved into employment, another two unemployed people gave up looking for work and dropped out of the labor force altogether.

In fact, the state’s labor force contracted more than 2.5 percent in 2013 at the same time that the state’s population grew by almost 1 percent.  And anytime the labor force shrinks while the population grows, the economy is moving in the wrong direction.

If the Times piece gets it right about the connection between unemployment benefit cuts and the shrinking labor force, it is a bit too trusting of Governor McCrory’s claims that his plan helped boost job creation in the state.

Perhaps Ms. Lowrey should have noted Ned Barnett’s important point from last week—by any measure, employment growth in 2013 was the weakest of any year since the end of the recession. North Carolina created just 37,700 jobs from January to November last year, almost half the 66,000 jobs created over the same period in 2012 and still short of the jobs created in 2011 and 2010. At the rate of employment growth achieved in 2013, it will take another 13 years for the state to create enough jobs to replace all those lost during the recession and keep up with population growth.

If Governor McCrory was correct that cutting unemployment benefits forced unemployed workers to find work, then we would expect to see unemployed workers moving into employment. But we don’t—we actually see the opposite.  There were actually 9,000 fewer people employed in November than in January—again, the worst performance since 2010. This means that unemployed people aren’t moving into jobs, they’re just dropping out of the labor force altogether.

The reality is that there are just not enough jobs, as unemployed workers outnumber available job openings by more than 3-to-1. This means that if every available job opening was miraculously filled tomorrow, there are so few job opportunities in the state that there would still be two unemployed workers with nowhere to go.

Finally, it’s worth pointing out that the biggest flaw with the Times piece—an error also made by recent commentary from Wells Fargo—is attempting draw conclusions about the effect of the unemployment benefits cuts by comparing the period before the cuts took effect on June 30 to some part of the period after the cuts took effect—the time between August and November.

There are a couple problems with this, the most glaring being that it assumes that all of the changes in unemployment from month to month are the result of policy and makes little effort to take into account the natural ebb and flow of seasonal hiring patterns or overall economic activity. For some reason, this approach also leaves out July, the first month the policies took effect. As a result, this type of analysis compares apples to oranges and really shouldn’t be trusted to say anything meaningful about the effect of cutting unemployment benefits.

So, the truth here is pretty straightforward.

Cutting unemployment benefits hasn’t created more jobs, it just pushed people out of the labor force.

2 Comments

  1. Cody Coleman

    January 22, 2014 at 4:10 pm

    Was finally just getting job leads in the IT field when the benefits got cut. figures 1 week later my car messes up cost over $600 to fix. Not lazy, was really depending on that money. Now i’m struggling just to have enough for gas. I really hope things get worked out soon.

  2. John garcia

    January 25, 2014 at 9:07 am

    I was on unemployment for on,y 6 months and they cut me off. I was employed at Pharmline in Goshen NY when they they decided to lay me off after 7 years. Recently I was able to find work and after a week the dam company lays me and 6 other guys off. Is that my fault? Why should I be penalized for it. I think that the people that have been on it for years should be penalized not us people who try or find work. I have a family to support and a mortgage to pay. Congress needs to move their ass and help the people who deserve this assistance and are trying here. This is ridiculous that they cannot decide what’s right and wrong in regards to this terrible ordeal. Crime rate will rise if they do not make this decision to extend benefits.