Thursday, December 12, 2013

A Natural Experiment on Emergency Unemployment Insurance in North Carolina

Update:  Here is an update with November numbers.

In February 2013, North Carolina passed a law that at the end of June, would end Emergency Unemployment Insurance (EUI).  This gives us a kind of natural experiment to get an idea of the effect of EUI on employment.

The apparent effects were large and immediate.

Normally, 0.6% of the labor force has been unemployed for more than 26 weeks.  Currently, that amount is about 2.6%.  From that population, about 0.7% of the labor force is on EUI.

My estimates, from the model I have been reviewing here in recent posts, estimates that the unemployment rate (UER) is inflated by about 1% due to EUI's effect on extending the average duration of unemployment.

This should mean that the Employment to Population Ratio (EPR) is deflated by about 0.6%.

My estimate for the positive effect of EUI on Labor Force Participation (LFP), which, unlike the other factors, is more of a broad guess, is currently about 0.15% of the labor force.

What Has Happened in North Carolina?

It appears that fairly immediately after the bill passed, even before it became enforced, all three indicators fell precipitously in North Carolina.  Real world data always throws us some curve balls.  The re-entry of 1% of the North Carolina labor force back into employment should have increased the EPR.

Maybe there is some other factor that has caused all these measures to decrease in North Carolina.  On net, since January, 1% of employed North Carolinians have left the work force, and in addition, 1% of unemployed North Carolinians have left the work force.

You could argue that the Keynesians were right, that UEI is stimulative, and that when North Carolinians stopped receiving benefits, they left the labor force out of discouragement.  Furthermore, they reduced their consumption, which caused more North Carolinians to lose their jobs.  But, this would be unlikely to lead to reduced UER.

I measured the level of each statistic, relative to the national level, and normalized them to the average levels for the 12 months of 2012.  Then I compared them:

From the point when the law was passed until it was implemented, compared to national averages, approx. 1% of North Carolina's adults ceased to be employed workers, on net, and left the labor force.  An additional 0.1% moved from being unemployed to being out of the labor force.  Compared to the 2012 average levels, both LFP and EPR decreased by about 0.7%.

Since the law took effect, the Labor Force has held steady, and 0.5% of adults, who were unemployed, have become employed, boosting EPR by 0.5% and lowering the UER by 0.8%.

Maybe the movements before July 2013 were unrelated to UEI.  I suppose I could create a narrative where North Carolinians, foreseeing a cut in benefits, cut back on consumption immediately upon passage.  This led to a Keynesian contraction.  After benefits were cut in July, workers were more incentivized to become re-employed, so the supply-side story kicked in, causing employment to rebound.

When I first saw this situation, I thought the drop in LFP might suggest that I have underestimated the effect of EUI on LFP.  But, it now looks to me like practically all of the LFP shrinkage was related to a decline in employment, which was either a Keynesian result of the cut in benefits, or was not related to the EUI law.

But, it looks plausible that the North Carolina experience will support both of my estimates that (1) unemployment is about 1% higher than it would be without EUI and that (2) LFP is slightly higher (less than 0.2%).

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