CHART OF THE DAY: North Carolina Has Demonstrated What Happens When We End Extended Unemployment Benefits

Unless Congress acts, an estimated 1.3 million Americans will lose unemployment benefits on Dec. 28 as the Emergency Unemployment Compensation (EUC) program expires.

What does this mean for unemployment in America?

JPMorgan’s chief U.S. economist Michael Feroli has a note out saying there’s evidence to suggest that the expiration of extended unemployment benefits could reduce the unemployment rate.

“The state of North Carolina offers a potential testing ground for this thesis,” wrote Feroli today. “In July, the North Carolina government decided to no longer offer extended benefits, even though the state still met the economic conditions to qualify for this federal program. Since July, the North Carolina unemployment rate has fallen 1.5%-points; in the same period the national unemployment rate has fallen 0.4%-point.”

He explains that there are two opposing forces driving this. First is the “employment effect,” which results from unemployed folks taking jobs for lower pay than they were waiting for. Second is the “participation effect,” which occurs because people just drop out of the workforce.

“Limited evidence suggests the participation rate effect might be more important,” wrote Feroli.

…Since July the labour force has declined by 0.8% in North Carolina, but fallen by only 0.3% nationally, and the participation rate is down 0.7%-point in North Carolina vs.. 0.4%-point nationally. Over the same time period, employment in North Carolina has grown by 0.8% in the household survey measure and 0.7% in the establishment survey measure; nationally employment is up 0.1% in the household measure and 0.6% in the establishment measure. Thus, in this case it would appear both channels are operative but the participation effect may be more important.

EUC, which started in 2008, grants jobseekers up to 99 weeks of compensation while they look for work. Meanwhile, standard unemployment last 26 weeks.

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