North Carolina had one of the highest and most persistent unemployment rates among all 50 states since the Great Recession. From December 2008 to December 2013, the unemployment rate in North Carolina was consistently higher than the national average, according the United States Bureau of Labor Statistics. Theoretically, people who are laid off in a recession have a hard time finding a job again in a short period of time because the shock to the labor market is aggregate, meaning unemployment is widespread across states and industries.
When people lose their jobs in such circumstances, they often depend on the unemployment benefits funded by both state and federal unemployment taxes paid only by employers. When the economic downturn comes in, the stock of state-run employment benefits quickly runs out. States have to borrow money from the federal government to meet the urgent demand of funds. Over time, states’ debt owed to the federal government is mounting to an unimaginable level that state lawmakers are worried about. This has been a problem the North Carolina legislature tried to tackle in the past few years.
North Carolina adopted a new system last year of giving out unemployment benefits that link the state’s unemployment rate and the maximum number of weeks that an unemployed person can receive benefit checks, according to David Ranii, a business reporter at The News & Observer. The rates are adjusted twice a year based on the quarterly change of the state’s unemployment rate. If the unemployment rate is on the rise to some thresholds, the maximum weeks will increase automatically and vice versa.
Since this policy became effective, opponents of the law bemoan that the jobless would have no incentive to keep looking for jobs because they have already been desperate, resulting in a drop in labor participation rates. But the data that come after the adoption of the new law suggest some ambiguous effect of the change.
Scholars have begun to pay more attention to monitoring macroeconomic data, including output and labor in North Carolina. The current views based on the data are actually conflicting. On one hand, as those opponents point out , the unemployment rate is declining, consistent with the national trend, but more people have dropped out of the labor force, giving up hope to land jobs for themselves. On the other hand, a new study conducted by the University of Pennsylvania’s Department of Economics suggests that overall employment is actually rising and labor force is growing rather than shrinking.
In their 2013 study, Marcus Hagedorn, Faith Karahan, Iourii Manovskii and Kurt Mitman used the Current Population Survey and Current Employment Statistics of the Census Bureau to construct a dataset that contains relevant series consistent with the past research of the labor market in North Carolina to seek evidence of any impact of the new law.
Although conventional wisdom says extended unemployment benefits keep the unemployed in the labor force, the study found that North Carolina data does not empirically support this claim. Surprisingly, employment and the labor force have both risen in the state, which is an optimistic sign of the labor market.
The logic behind these empirical results is that people adjust their expectations and thus alter their behavior if they know sufficient information in advance. If unemployment benefits that provide enough for people to sustain their basic needs for living are extended for too long, a fraction of unemployed people, certainly not all, have no incentive to look for jobs, because they suspect their working wages would not exceed the unemployment benefits by much. All the changes in the law are not aimed to start a war against the poor, but rather to give them motivation to put as much effort toward looking for a job as possible. Setting a maximum number of weeks that people can receive unemployment benefits depending on the average jobless rate is reasonable and would potentially minimize the waste of taxpayers’ money.
The new adjustment of the law will definitely cause some pain for some unemployed people, but it is more likely to bring fundamental change to the persistent unemployment rate that has been haunting the state for so long.
