Economists: Budget deal cutting unemployment insurance may not help recovery

  • Article by: JIM SPENCER and DEE DEPASS , Star Tribune staff writers
  • Updated: December 13, 2013 - 10:06 PM

Compromise in Congress is not expected to do much to reduce jobless rate.


Since losing her $13-an-hour job at the Dakota Institute in June, Yolanda Gray has taken several employment training classes.

Photo: JIM GEHRZ •,

CameraStar Tribune photo galleries

Cameraview larger

Yolanda Gray learned Thursday night that Congress is not going to extend her $230 per week unemployment benefits, which expire next month. The 38-year-old Minneapolis mother of four was shocked, then scared.

Since losing a $13-an-hour counselor’s job at the Dakota Institute in June, Gray has applied for countless openings at hospitals, clinics, offices and schools. She’s taken several employment training classes, graduating Friday from the latest class at the Minnesota Workforce Center on Lake Street.

“I get to the point where I cry and pray, hoping something comes through,” Gray said. “I have just enough money to pay January’s rent.”

Cutting off extended unemployment insurance to 1.3 million Americans — including 8,500 Minnesotans — in January became a centerpiece of the budget deal passed overwhelmingly by the U.S. House of Representatives this week and expected to be passed by the Senate.

Congress had extended benefits beyond the normal 26 weeks to help workers displaced by the Great Recession. In addition to those who lose benefits in January, the White House says another 3.6 million Americans would have become eligible for extended benefits in 2014. That number includes 57,000 Minnesotans who would have qualified for an additional 14 weeks of help.

Republicans want to limit unemployment benefits as part of their effort to attack the deficit, while increasing people’s incentive to find work. Democrats have capitulated in the spirit of compromise to avoid chances of another government shutdown.

But economists say the move will only minimally reduce the nation’s jobless rate and will not add measurably to the ability of the long-term unemployed to find work.

“Most of the people who lose unemployment insurance will not [immediately] find a job,” predicted Rob Valletta, an economist at the Federal Reserve Bank of San Francisco. “They will fill in with food stamps or other kinds of welfare payments. But mostly, lost unemployment insurance income will not be replaced. Household income will go down.”

Meanwhile, the people who take jobs they might not have accepted if they still received unemployment payments will barely make a dent in the economy.

“If we cut off emergency extended benefits, we might see the unemployment rate drop by 0.1 or 0.2 percent,” said economist Michael Strain of the American Enterprise Institute, a conservative free market think tank. “But more people would drop out of the labor market than would end up with a job.”

Valletta said the impact of taking away benefits from the unemployed is “very small for re-employment.”

He has measured empirically the impact of extended jobless benefits on return-to-work rates. Most of the unemployed are not content living off the government, he found. The problem is that the Great Recession was so harsh that jobs are still relatively scarce several years into the recovery.

“The labor market has added 200,000 jobs a month the last few months,” Valletta said. “That’s actually pretty good. But we’ve got such a hole to dig ourselves out of.”

The upshot is very bad news for those whose benefits will be cut off. The chances of finding work always have diminished significantly the longer a person remains unemployed. But since the Great Recession, Valletta says the odds have grown longer: These days, a person out of work for six months has about a one in 10 chance of finding work, according to Valletta’s calculations. Those out of work for more than a year have a one in 13 chance.

Hopes dashed

Susan La Roque drove a bus for the Head Start early-education program in Minneapolis until funds were cut in May of this year. She’s been applying for administrative support jobs and hopes something comes through soon. Her unemployment insurance just ended, and she applied for the 14-week extension available in Minnesota. Congress dashed her hopes.

LaRoque has six months of living expenses saved, so she knows she can make it for a while. After that, she said, “it’s scary. I won’t have anything coming in.”

  • related content

  • Yolanda Gray is among the 8,500 Minnesotans who will be losing their unemployment insurance.

  • get related content delivered to your inbox

  • manage my email subscriptions





Connect with twitterConnect with facebookConnect with Google+Connect with PinterestConnect with PinterestConnect with RssfeedConnect with email newsletters