Emergency Unemployment Aid Lapse to Lower U.S. Jobless Rate

Allowing emergency unemployment benefits to expire at the end of the year would cause the U.S. jobless rate to decline by as much as 0.5 percentage point, according to Michael Feroli at JPMorgan Chase & Co.

Out-of-work Americans who no longer receive benefits are more likely to drop out of the labor force, accounting for most of the drop in the unemployment rate, the bank’s chief U.S. economist in New York said today in a note to clients. The hit to consumer spending could also subtract around 0.4 percentage point from annualized first-quarter growth, he said.

Legislators are debating whether to extend the current temporary program, signed into law in June 2008, that increased the duration of unemployment compensation during the recession. Federal Reserve policy makers use the unemployment rate to help gauge improvement in the labor market as they consider scaling back $85 billion-a-month in bond purchases.

“This makes it a little challenging for the Fed,” Feroli said in an interview. “This would imply you could get a decline in the unemployment rate without necessarily seeing an acceleration in job growth, which would continue the conundrum that we’ve faced over the past two years.”

The unemployment rate rose to 7.3 percent in October after as many as 800,000 federal workers were furloughed during last month’s government shutdown. In its survey of 60,000 households, the Labor Department extrapolated the effects of the impasse to determine the jobless rate.

Participation Rate

The labor force participation rate sank to 62.8 percent during the month, the lowest level since March 1978. The rate could fall to 62.5 percent within a “few months” of the benefits’ expiration, according to Feroli’s calculations.

Signed by President George W. Bush, the original law for the current program of emergency benefits has been amended 11 times and is scheduled to expire Dec. 28 unless lawmakers intervene, according to Congressional Research Service.

Should the emergency benefits be allowed to expire, more than 2 million unemployed workers will lose aid by the end of March 2014, according to a report from the National Employment Law Project.

Democrats say an extension is necessary to stimulate consumer demand and job creation, while others maintain that the emergency benefits instead contribute to unemployment.

Another continuation this year seems unlikely, as Republicans look to wrap up some of the temporary legislation linked to the recession and Democrats are left with little leverage, according to Stephen Myrow, managing director at Washington-based ACG Analytics Inc.

Since Recession

That hasn’t stopped them from trying. House and Senate Democrats on Nov. 20 introduced legislation for a one-year extension of the emergency unemployment benefits, citing the sluggish economic recovery. Employment is still down 1.5 million from the end of 2007, when the last recession began, and the program has already been scaled back due to sequestration.

Others point to the slow recovery as proof the program hasn’t worked to create jobs. Extending benefits pushes up the market-clearing wage that employers have to pay and discourages them from creating vacancies, according to an October 2013 paper published by the National Bureau of Economic Research. It also lowers profits and boosts unemployment, the report said.

“Most of the persistent increase in unemployment during the Great Recession can be accounted for by the unprecedented extensions of unemployment benefit eligibility,” according to the report.

The Fed has said it will keep short-term rates at almost zero at least as long as unemployment is above 6.5 percent and the forecast for inflation is below 2.5 percent.

Policy makers last week signaled they may taper “in coming months” if the economy improves as anticipated, according to the record of the Federal Open Market Committee’s Oct. 29-30 gathering, released Nov. 20 in Washington.

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