By Lucia Mutikani
WASHINGTON Dec 3 The U.S. unemployment rate
could fall substantially early next year as belt-tightening in
Washington throws more than a million long-term unemployed
Americans off the benefit rolls.
The loss of benefits could spur former recipients to either
drop out of the labor force or accept jobs they previously would
not have considered. Some economists estimate this could lower
the current unemployment rate of 7.3 percent by as much as half
a percentage point.
"The lapsing of the program could lower the unemployment
rate by perhaps 0.25-0.50 percentage point, with much of the
effect coming through reduced labor force participation, rather
than increased employment," said Michael Feroli, an economist at
JPMorgan in New York.
To receive jobless benefits, Americans are required to be
actively looking for work. That is also a key factor that
defines who is unemployed, as opposed to those who have dropped
out of the labor force.
Emergency jobless benefits for 1.3 million long-term
unemployed people are set to run out on Jan. 1 unless the U.S.
Congress agrees on an extension.
The National Employment Law Project, a New York-based
advocacy group, estimates that about 850,000 people will run out
of state unemployment benefits in the first quarter of 2014,
with no access to emergency benefits if lawmakers do not act.
The emergency unemployment compensation program was
introduced in 2008 during the depths of recession, and has been
extended every year since then. It has paid out more than $225
billion to cushion the long-term unemployed as the economy
struggled to heal from the recession.
The nonpartisan Congressional Budget Office said on Tuesday
extending the program for another year would increase employment
by 200,000 by the end of the fourth quarter of 2014 and add 0.2
percentage point to gross domestic product.
The CBO was responding to a letter from a Democrat lawmaker,
Chris Van Hollen, asking for an assessment of the program's
impact on the economy. The CBO also noted that extending the
program would increase the federal government debt.
President Barack Obama and his fellow Democrats want to
include an extension of the program in any budget deal hammered
out by a bipartisan panel. A negotiating panel has been given a
Dec. 13 deadline to reach a deal to fund the government.
With little time left, and given opposition to an extension
among some Republicans, analysts say it appears likely the
emergency benefits will expire as scheduled on Jan. 1.
HEADACHE FOR FED
The U.S. jobless rate has dropped 2.7 percentage points from
a peak of 10 percent in October 2009, though some of the decline
has been due to Americans giving up the search for work.
Goldman Sachs expects an expiration of emergency benefits
would reduce the jobless rate by between 0.1 and 0.2 percentage
point in early 2014.
"If, hypothetically, all workers receiving emergency
unemployment benefits dropped out of the labor force once
benefits expired, this would result in a 0.8 percentage point
decline in the unemployment rate," said Alec Phillips, an
economist at Goldman Sachs in Washington.
"If all of these workers became employed, the resulting
unemployment rate would be only slightly lower. However ... we
would expect the actual effect on the unemployment rate to be
significantly less dramatic than either of these hypotheticals."
Should the unemployment rate drop because former recipients
of jobless benefits have dropped out of the labor force, that
could pose problems for the Federal Reserve, which has put the
unemployment rate at the center of monetary policy.
The Fed has said it will hold interest rates near zero at
least until the jobless rate drops to 6.5 percent. But if a big
part of the decline reflects people dropping out of the labor
force, that could be seen as a sign of weakness, not strength.
"Such a fall in the unemployment and participation rates
could create some tricky choices for Fed policymakers as they
assess the health of the labor market," said JPMorgan's Feroli.
Not only will the expiration of emergency benefits affect
the unemployment rate, it could also hit consumer spending and
ultimately economic growth in the first quarter of 2014.
"The program currently pays out benefits at around a $20-
25 billion annual rate," said Feroli. "Should that flow dry up,
consumer spending could take a hit in the first quarter, perhaps
subtracting around 0.4 percentage point from annualized real GDP
growth in that quarter."