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.

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

Photo: JIM GEHRZ • jgehrz@startribune.com,

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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.”

Those who have lost jobs may push harder to find work as unemployment benefits expire, explained Randy Johnson, director of Workforce Development Inc. in Rochester. “But what you find are people who have lost confidence. They are trying but striking out.”

Jim Seas, now communications director for the employment program HIRED in Minneapolis, was jobless for 17 months after being laid off. At one point he sold his class ring, clothes and other items to put food on the table.

“This can affect anyone, anywhere, at any time,” Seas said.

To be sure, there are unemployed people who choose government benefits over jobs they don’t want. Nicole Snell has seen that as manager of Express Employment offices in Edina, Eagan and Chanhassen. She places workers in jobs paying $10 to $13 an hour.

“There are definitely people out there who legitimately need the benefit,” Snell said. But “you would be surprised at the number of people we call who don’t have jobs, and they say, ‘I make more money on unemployment, so I am not interested,’ or ‘I would rather just wait until my unemployment runs out.’ ”

Government savings from ending extended unemployment benefits will be about $26 billion in the next two years, according to the Congressional Budget Office. However, that savings will be offset partly by likely reductions in consumer spending that CBO believes will decrease gross domestic product and actually could cost the economy 200,000 jobs by the fourth quarter of 2014.

“Last month, we added 230,000 jobs. We could literally be wiping a month of job growth by doing this,” said Rep. Keith Ellison, a Democrat from Minneapolis who voted against the budget deal.

The dynamics of unemployment sometimes defy easy conservative-liberal distinctions. Strain is a conservative free market advocate. Nevertheless, like his ideological foil Ellison, he believes history and current conditions make the case for continuing to extend unemployment insurance.

His reasoning is simple: The long-term unemployment rate is still roughly twice what it was when extensions were ended in previous recessions.

But, Strain acknowledged, “Every policy decision is partly based on economics, partly based on politics and partly based on philosophy.”

Harry Holzer of Georgetown University’s school of public policy says appearances held sway in the budget deal. The usually antagonistic House and Senate wanted to be seen as working together. The problem, explained Holzer, is that the rare show of cooperation will do very little to get more Americans back to work.

“This is not good government,” Holzer said. “But by now we’re so far from good government that people are actually cheering this agreement.”

Lisa Dvorak of Champlin is not among them.

Dvorak was making $23 an hour as a team leader in a UCare patient call center when she was laid off in March 2013. Now when she applies for jobs, recruiters either think she is overqualified because of her past pay scale, or underqualified because she doesn’t have a college degree. With her $350 a week unemployment checks set to disappear, Dvorak rides “a roller coaster of emotions.”

“I don’t sleep much at night,” she said. “I wake up thinking, ‘What is going to happen to us?’ ”

Dee DePass • 612-673-7725

Jim Spencer • 202-383-6123

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