Stimulus From Jobless Aid Fades as U.S. Hiring Grows: Economy

By the time Congress got around to passing an extension of emergency jobless benefits last week, Clyde Lance no longer needed them.

On Dec. 17, his 52nd birthday, Lance started a full-time job helping train technicians for the International Society of Automation in Research Triangle Park, North Carolina, ending a three-year search for a permanent position.

“I didn’t even realize it was my birthday,” said Lance. “I believe God helped me, gave me this job.”

The dwindling ranks of the long-term unemployed, while testament to the improvement in the labor market, also shows the diminishing returns from what economists such as Mark Zandi say is one of the most effective government programs implemented to spur the recovery: extended unemployment insurance payments. By the time all figures are in, Lance will be among the almost 1.5 million people who stopped getting those checks last year.

“The bang-for-the-buck from the program is among the highest of any fiscal-stimulus program,” said Zandi, chief economist of Moody’s Analytics in West Chester, Pennsylvania, who estimated that every dollar spent in benefits generated 1.55 times as much economic activity. “It is important to have it in place as long as unemployment is high and the recovery is fragile.”

The legislation passed by Congress last week preserved benefits for harder-hit states that provide payments to the jobless for as long as 73 weeks, extending the normal program that typically lasts for the first 26 weeks of unemployment. About $30 billion in long-term benefits will be paid this year, down from about $45.5 billion in 2012, according to government estimates.

Growth Impact

Had the benefits lapsed, it would have decreased economic growth by almost 0.2 percentage point this year, according to estimates by economists at JPMorgan Chase & Co. in New York.

Of course, some of that shortfall will be made up by the bigger paychecks and the subsequent gains in spending of the newly hired workers who no longer get jobless payments.

The number of Americans on extended and emergency benefit rolls dropped to 2.07 million in the week ended Dec. 15, the latest data available, from 3.56 million in the last week of 2011 and 4.72 million in the same period in 2010, according to figures from the Labor Department. That reduces both the stimulus provided by the extension and the program’s costs.

Fewer Qualify

To be sure, the decline isn’t totally due to gains in employment. As state jobless rates fall, some no longer qualify for payments from the federal government, depriving the remaining long-term unemployed of benefits.

The unemployment rate has declined from a 26-year high of 10 percent in October 2009 to 7.8 percent in December, according to a Labor Department report last week. The economy added 155,000 jobs last month, and has regained 4.78 million of the 8.78 million lost as a result of the recession.

The share of all jobless out of work for 27 weeks or more dropped in December to 39.1 percent, the lowest since October 2009, last week’s Labor report showed. The decrease probably reflects both the improvement in the labor market and the fact that some discouraged workers have abandoned the job search. To be classified as in the labor force and unemployed, a person must be actively looking for a job.

Fewer Payments

In early 2010, the total number of workers drawing jobless benefits, including extended, emergency and regular payments, reached 12.1 million. That number has since declined to 5.4 million as of Dec. 15.

The extension of the emergency jobless benefits comes as Congress agreed to some tax increases that will slow economic growth. In the agreement ultimately struck by lawmakers on Jan. 1 and signed by President Barack Obama, payroll taxes will return to 6.2 percent from 4.2 percent.

The increase in the levy, used to pay for Social Security benefits, reduces paychecks by $41.67 for someone earning $50,000 who is paid twice a month. The agreement also makes permanent the George W. Bush-era income tax cuts for 99 percent of Americans, while letting them end for top earners.

The tax increases may clip growth in the first quarter to 1.5 percent or less from 3.1 percent in 2012’s third quarter, according to economists at JPMorgan Chase and Bank of America Corp. The expansion will strengthen later in the year as the housing market continues to rebound, they forecast.

Treasury Comments

“The expiration of the payroll tax will affect a broad range of households,” Treasury Assistant Secretary for Economic Policy Janice Eberly said during a briefing with reporters in Washington on Jan. 4. “For that reason, the agreement also includes support for the unemployed, the extension of the middle-class tax cuts to continue to provide broadly based support for the economy.”

The Standard & Poor’s 500 Index has climbed 2.2 percent so far this year through yesterday as the deal averting the so-called fiscal cliff was struck. Yet the fate of automatic spending cuts that were forestalled by two months remains unresolved, and the U.S. is again nearing the statutory borrowing limit set by the debt ceiling.

The extended benefits program “actually is a very sizable additional support for those who are still looking for a job,” Ellen Hughes-Cromwick, chief economist at Ford Motor Co., based in Dearborn, Michigan, said on a Jan. 3 conference call.

Running Out

Lance landed his job about three weeks before his regular unemployment checks would have run out.

“If the extensions hadn’t come back again, I would have been living on nothing,” he said.

Such a prospect prompted Lance to get involved with, a website for the National Employment Law Project that advocated for extending the unemployment benefits. He agreed to tell his story to help the 2 million Americans still drawing extended benefits who haven’t been as successful, he said.

“It’s a great feeling to have a job,” said Lance. “I still want to help other unemployed people by doing anything I can do.”

Before it's here, it's on the Bloomberg Terminal.