Progressive Voices

North Carolina dreaming

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Conservative pundit swings and misses in his defense of unemployment insurance cuts

Last year North Carolina’s conservative Republican legislature got tough. It sharply reduced the duration of unemployment benefits and made them much more difficult to collect. The changes took effect at the start of July, 2013. Their story was that unemployment insurance and other benefits discourage workers from seriously looking for jobs. If we take away this crutch of unemployment benefits, then workers will figure out how to find jobs. This both saves the government money and is better for the workers themselves since they will actually be making a living on their own.

We now have data for 10 months into the experiment (through May) and John Hood, the chairman and president of the John Locke Foundation, a North Carolina think tank, has a piece in the Wall Street Journal telling us that it is a resounding success. Hood tells readers:

“According to the U.S. Bureau of Labor Statistics, the number of payroll jobs in North Carolina rose by 1.5% in the second half of 2013, compared with a 0.8% rise for the nation as a whole. Total unemployment in the state dropped by 17%, compared with the national average drop of 12%. The state’s official unemployment rate fell to 6.9% in December 2013 from 8.3% in June, while the nationwide rate fell by eight-tenths of a point to 6.7%.”

Okay, let’s take these in turn. North Carolina did have more rapid job growth than the rest of the nation in the period since it cut benefits, but it also has had more rapid job growth than the rest of the nation for the last four decades, before many of the benefit cutters were even born. This is because it is in the South, which has been growing more rapidly than the Northeast and Midwest for quite some time. (My explanation is air-conditioning, but you’re welcome to throw in other items.)

If we look at North Carolina’s labor market over the last year (May 2013 to May 2014) we find that the number of jobs, as measured by the Labor Department’s establishment survey, grew at 1.92 percent rate. This beats the 1.86 percent rate for the rest of the South Atlantic region, but the difference certainly is not enough to employ all the people who were cut off from the unemployment rolls. (The South Atlantic region is a grouping of states from Florida to Maryland. It has been used by government agencies for many decades.) If the argument is that the ending of benefits put the fear of God in the unemployed and made them finally get serious about working, these numbers don’t do much to support the case.

The situation gets even worse if we pull out the Charlotte-Gastonia-Rock Hill area. The reason for pulling out this relatively fast growing region is that it straddles the border with South Carolina. Many of the workers who have gotten jobs with companies in North Carolina actually live in South Carolina. If unemployed workers’ past employment experience had been in South Carolina, they will not have any additional motivation to find work as a result of North Carolina cutting benefits.

We can’t know how many of the new workers the Charlotte metropolitan area are from South Carolina, but it is striking that if we pull out this area, North Carolina’s job growth slightly lags the rest of the South Atlantic region. Excluding the Charlotte area, job growth in the state was 1.76 percent over the last year, roughly a tenth of a percentage point less than the average for the rest of the region. This means that outside of the Charlotte area, it doesn’t seem that the cut in benefits did anything to increase incentives to work. As a practical matter, the differences in both directions are small, but the point is that there is no evidence that cutting benefits did anything to increase employment growth in North Carolina compared with comparable states.

As far as the great news on unemployment that Hood cites, this is entirely a story of North Carolina workers giving up looking for work and leaving the labor market. (In order to collect unemployment benefits, workers must be looking for work.) While the size of the labor force in the rest of the region grew by 1.0 percent over the last year, the labor market shrank by 0.2 percent in North Carolina. Employment growth in North Carolina, as measured by the Labor Department’s survey of households, was 1.9 percent over the last year. That compares to 2.2 percent growth for the rest of the region. Again, no evidence that the ending of benefits got people to be serious about looking for work. The evidence is that they gave up looking for work and dropped out of the labor force.

Not content to rest his case that cutting unemployment benefits increases employment on the North Carolina alone, Hood moves on the national picture:

“Still not convinced that leaving the extended-benefits program encouraged both job creation and job acceptance? As of Jan. 1, 2014, the extended-benefits program expired nationwide. Yet there has been no sudden exodus of discouraged workers to the fringes of the national economy. Both job creation and household employment are up. The nation’s employment-population ratio was 58.9% in May, up from 58.6% in December. The labor-market effects of reforming unemployment insurance may not be massive. But they certainly don’t appear to be negative.”

Actually what is most striking in the data for 2014 is the sharp drop in labor force participation. The labor force participation rate is down by an average of 0.5 percentage points from the first six months of last year to the first six months of this year. This corresponds to roughly 1.3 million people leaving the labor force. Usually labor force participation rises during an upturn, so this is certainly consistent with a story of many unemployed workers giving up looking for work when their benefits expire.

In short, if we look at the data instead of playing games with it, the story is pretty clear. There is zero evidence that cutting unemployment benefits in North Carolina or the rest of the country did anything to spur job growth. There is much evidence that it led those who saw their benefits to end to give up looking for work and to drop out of the labor force.

Economist Dean Baker is the co-director of the Center for Economic and Policy Research in Washington, DC. The above article first appeared on the Center’s website – www.cepr.net.

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