In July, North Carolina cut off unemployment benefits for those who have been on benefits for 19 weeks, down from 99. This made it a test run for what would happen nationally after January 1, when the federal extension of unemployment benefits expired.
The steep drop in North Carolina’s unemployment rate after the benefit cut has attracted enormous attention from the media and blogosphere. Two data-armed camps have formed, one, including the Wall Street Journal editorial board, arguing that the North Carolina experiment has been a success, driving up employment, and the other, including Paul Krugman, arguing that it has been a failure, driving people out of the labor force entirely.
So did the medicine make the patient better or give him new problems? We would suggest that it couldn’t have done nearly as much of either as each side claims.
U.S. gross domestic product (GDP) growth in the second half of the year was fairly robust (4.1% annualized in Q3, 3.2% in Q4). The acceleration in growth was coincident with the policy change, and could account for at least part of the impact on unemployment. As the graphic above shows, other states also experienced large drops in unemployment in Q3 and Q4.
We used South Carolina’s unemployment figures – historically tightly aligned with North Carolina’s – to predict what North Carolina’s unemployment rate would have been in the absence of the policy change. On the basis of the fall in South Carolina’s unemployment rate in Q3 and Q4, North Carolina’s unemployment rate should have fallen from 8.9% to 8%. Instead, it fell to 6.9%. This suggests that roughly half the fall can be attributed to the policy change; the other half was just down to good old-fashioned better growth.
- Heritage Foundation's Foundry: Examining North Carolina’s Falling Unemployment Rate
- WSJ's Real Time Economics: What Happens When Unemployment Benefits Are Cut? North Carolina Offers a Clue
- Washington Post's Wonkblog: What Happens When Jobless Benefits Get Cut? Let’s Ask North Carolina
- Hagedorn, Karahan, Manovskii, & Mitman: Case Study of Unemployment Insurance Reform in North Carolina
Read about Benn’s latest award-winning book, The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order, which the Financial Times has called “a triumph of economic and diplomatic history.”