How Not Extending Jobless Benefits Will Bring Down Unemployment

Lawmakers have finally found a way to bring down the jobless rate, but not by creating jobs.

By + More

Lawmakers may have found an unlikely way to bring unemployment way down: cutting extended jobless benefits.

The Senate is scheduled to vote Tuesday on a measure that would extend long-term unemployment benefits. At stake are over jobless benefits to 1.3 million Americans whose unemployment insurance ran out at the end of 2013, plus an additional 850,000 who could lose benefits in the first three months of 2014, according to calculations from the National Employment Law Project.

If these people lose their benefits, many may stop looking for work altogether. And if they do, it could bring the jobless rate down substantially.

That's because of the way the unemployment rate is calculated. The headline unemployment rate is calculated by dividing the number of people who are both out of work or looking for work by the total labor force: those looking for work plus those who are currently employed.

[READ: Obama Slams GOP Over Jobless Benefits]

"If the benefits are not extended, there will be some group of individuals who may give up their job search simply because the reason for doing it wasn't an expectation that there were jobs out there, but rather the necessity of going through the motions to maintain their eligibility," says Patrick O'Keefe, director of economic research at accounting firm CohnReznick and a former deputy assistant secretary at the Labor Department.

However, he adds that there's no way of knowing.

"It could go down, but the degree is not well-known," he says. As Reuters reported in December, some economists believe the rate could fall by as much as half a percentage point as the long-term unemployed drop out of the labor force.

What's the most it could fall? Based on the most recent employment figures (from the November jobs report), if 1.3 million unemployed people were to simultaneously drop out of the labor force, not having found jobs, the jobless rate would not be 7.0 percent but 6.2 percent. Add in those who could lose benefits in the first quarter of 2013 and the jobless rate would by 5.7 percent.

Such a large dive in the rate is not likely – some of those people will find jobs or at the very least continue looking – but the point in examining the math behind the figures is that, even after five years of recovery, the long-term unemployed still make up such an unprecedentedly large share of the total jobless Americans that policy regarding their fortunes could create sizable shifts in the jobless rate. Currently, 37.3 percent of all unemployed have been out of work for 6 months or more – down from a peak of over 45 percent in early 2011, but also far higher than in any preceding period on record, as U.S. News reported in December.

[ALSO: For the Long-Term Unemployed, Dysfunctional Congress Is the Last Hope]

Source: Federal Reserve Bank of St. Louis

Of course, the real question at hand is how to improve the lot of those who have been out of work for over six months. For his part, O'Keefe believes the debate over jobless benefits is a distraction from what is really needed: ways to help these people rebuild job skills and start working again, as opposed to simply providing income support.

"This whole extension of unemployment benefits issue is typical Washington," he says. "What they're not asking themselves is – when people have been unemployed for six months or longer, what services, what additional efforts need to be provided to them in order for them to become more competitive or more employable?"

More News:

  • Sen. Harry Reid Gives Hope to the Long-Term Unemployed
  • Democrats Attack Republicans Over Unemployment Benefits
  • Opinion: Republicans Play Grinch By Refusing to Extend Unemployment Insurance Benefits