North Carolina’s Unemployment Insurance Experiment

by Reihan Salam

One of the reasons I agree with Michael R. Strain’s argument that unemployment benefits should be extended (and reformed) is that, as Evan Soltas reports, the results of the expiration of unemployment benefits in North Carolina have been discouraging. In July, North Carolina cut the maximum length of UI benefits from 99 weeks, or almost two years, to 19 weeks, and the number of people receiving unemployment benefits has (as you’d expect) decreased sharply:

As intended, presumably, the number of North Carolinians receiving unemployment benefits has collapsed. It’s down by 45,000, or 40 percent, since last year. Expiring benefits aren’t the only reason for this. Far fewer are filing a claim in the first place. Initial claims are running at about half last year’s rate. Unemployment insurance is a thinner safety net than it has been in decades.

In addition, North Carolina’s labor force began to shrink. The state is experiencing the largest labor-force contraction it’s ever seen — 77,000 fewer people were working or searching for work this October than a year ago. This should, but won’t, settle a partisan debate. Cutting unemployment insurance apparently hasn’t encouraged the unemployed to look harder for work: It has caused them to drop out of the labor force altogether.

To get unemployment insurance, you have to actively search for work and prove that you’re doing so. The drop in the labor force suggests that this incentive was effective. Without it, more people just give up.

Soltas then goes on observe that civil society groups, like food pantries, have been picking up the slack, and he finds the outcome of this policy experiment discouraging. One could argue that we haven’t allowed this policy experiment to go on long enough, i.e., that we should wait and see if civil society in North Carolina eventually adapts to the labor-force contraction that has followed the expiration of UI benefits — perhaps social entrepreneurs will find ways to retrain workers and reintegrate them into the formal labor market. This would be a good cause for North Carolinians, and in particular conservative North Carolinians, to take up. But it is easy to see why Soltas is reluctant to place this bet.

P.S. Scott Lincicome draws on recent unemployment data from North Carolina to suggest that the expiration of unemployment benefits might have had positive consequences. I recommend reading his piece, which critiques Soltas’s argument, and my willingness to accept it at face value. In my defense, I actually don’t think of myself as an enthusiast for extending UI benefits. Rather, I think of myself as someone who has found Michael R. Strain’s arguments convincing, hence the first sentence of my post. And I think that an extension might be an acceptable political price to pay for reform of UI benefits. But Lincicome’s piece is worth reading regardless.

I should also note that Evan Soltas and I made an error, which was caught by Mitchell Hirsch of the (left-of-center) National Employment Law Project brought to my attention. The maximum length of UI benefits was not 99 weeks when North Carolina ended federal Emergency Unemployment Compensation (EUC) benefits on July 1st. Rather, EUC benefits lasted for 47 weeks, which, when combined with state benefits, made for a maximum duration of 73 weeks, as the extra 20 weeks of federal Extended Benefits (EB) had expired in June of 2012. In light of Lincicome’s broader point that Soltas and I might be subject to confirmation bias, it occurs to me that in his detailed critique of my (frankly rather cursory post), he didn’t mention that Soltas and I overstated, by a significant margin, the generosity of unemployment benefits. So I’m grateful to Mitchell Hirsch for the assist.