As Extended And Emergency Unemployment Benefits Finally Begin Expiring, A Much Different Employment Picture Emerges

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The following very interesting analysis from Goldman focuses on an issue long-discussed on Zero Hedge and elsewhere, namely what happens when those millions in unemployed currently collecting unemployment insurance, finally start to roll off extended and emergency benefits, as terminal benefit exhaustion sets in, even with ongoing governmental unemployment stimulus programs. Goldman's estimate: approximately 400,000 people will no longer have the backdrop of so-called  "government jobs" in which workers receive on average $1,200 a month for doing nothing. "If the rate of exhaustion continues at the current pace, this implies over 400,000 workers will exhaust their benefits in some months, even if Congress continues to extend the current, more generous, unemployment program." What this means for the economy is, obviously, nothing good: "Assuming something on the order of 400,000 exhaustions per month, at an average benefit of $1200 per month, this implies roughly $0.5 billion in lost monthly compensation compared with a scenario in which there are no exhaustions.  If the relationship between exhaustions and initial claims 16 to 17 months prior (the maximum benefit period in most states) holds constant, the pace of exhaustions is likely to stay elevated for several months, implying several billion dollars in cumulative lost compensation." Couple this with front-loaded tax refunds, also previously discussed on Zero Hedge, and the "consumer-driven" economy in next few months is sure to see a rather substantial shakedown. Absent a dramatic increase in (c)overt Obama unemployment stimulus, is the extend-and-pretend phase of the bear market rally about to end?

From Goldman Sachs:

Expanded unemployment benefits expired on Monday, after the Senate failed to enact legislation to renew them and several other programs.  These have since been reinstated, but the brief expiration may still result in a temporary cessation of benefits to roughly 250,000 unemployed this week.  We do not expect this have a significant effect on incomes, as the effect will be temporary. It should also not have an important effect on weekly jobless claims reports, as the affected benefits are not included in the regular continued claims data.

Aside from the short-term disruption, an increasing number of individuals will face an end to benefits over the next several months even with continued renewal of the current emergency benefits by Congress.  More than 400,000 jobless workers could run down their federal benefits each month over the next several months, even assuming that Congress continues to renew the expanded benefit period now in place.  It is possible that Congress could lengthen the maximum benefit period yet again, but the political climate is not as conducive to additional expansions as it had been last year.  The result is likely to be a greater share of unemployed workers not receiving unemployment compensation.

Jobless Benefits: Brief Disruption Now, Bigger Issues Ahead

Unemployment benefits were back in the news this week, after the Senate failed to come to agreement on a short term extension of the more generous benefit period Congress enacted in 2008 and expanded in 2009. The result was a short term disruption to benefits, but one that should be temporary. However, policymakers face a longer term issue, as the number of current recipients who will lose benefits over the next several months is likely to climb substantially, with benefit exhaustions potentially approaching 500,000 in some months.  In previous instances in 2008 and 2009 which the number of individuals facing benefit exhaustions has threatened to rise substantially, Congress has intervened by adding additional weeks to the maximum benefit period.  But with the maximum benefit approaching two years and waning support for additional stimulus spending in Congress, it isn’t clear whether another extension is in the cards.

The disruption to benefit payments caused by the legislative snag in the Senate will be temporary.  Something like 250,000 individuals may have temporarily lost benefits this week as a result of the expiration of expanded unemployment benefits at the end of February.  However, this is far short of what some reports had implied, namely that expanded benefits had ceased entirely. Instead, it was only those workers who had exhausted a benefit “tier” the prior week who were unable to start their next tier, and thus unable to collect additional benefits (see chart below). The effect on income should be relatively minor, at less than $100 million on a national basis, and retroactive reinstatement should make up most of that revenue in any case.  

 

 

More workers are moving from regular benefits into emergency benefits.  The chart above illustrates this process.  Workers who qualify for jobless benefits begin by receiving 26 weeks of standard unemployment benefits. They then move into the first of four tiers of emergency benefits, described at the bottom of the exhibit above. The third tier is generally available to states with an unemployment rate of more than 6%, so that most states are currently eligible. The fourth tier is available to states with an unemployment rate above 8.5%, which applies to a more limited group of states.  Once jobless workers move through the tiers for which they are eligible, they usually move to state extended benefit programs, which once again depend on the unemployment rate in a given state and last an additional 20 weeks. In all, this means a laid off employee can receive benefits for 99 weeks, or almost two years, after losing employment. The result is that total uninsurance compensation rolls have risen significantly, even while regular continued claims have fallen (see chart below; note that Tier IV has few beneficiaries and isn't visible on the chart).

 

 

Most workers in latter tiers of the benefit structure are exhausting their benefits….  The chart below illustrates the exhaustion rate in each tier, that is the number of workers who collect all of their payments without finding work, as a share of total initial claims in each segment.  Note that Tier III and Tier IV have been available for only three months, and thus have just begun to see exhaustions (there is only one data point for Tier III, shown below, and the one point for Tier IV isn’t meaningful).   However, in absolute terms the numbers are beginning to mount. For instance, over 100,000 workers exhausted their Tier III benefits last month, and for some of them this will be the end of unemployment compensation (a few will move to Tier IV benefits, and others will move onto state emergency benefits for a few months before completely exhausting their eligibility)  If the rate of exhaustion continues at the current pace, this implies over 400,000 workers will exhaust their benefits in some months, even if Congress continues to extend the current, more generous, unemployment program.

 

…Because the duration of unemployment has lengthened significantly.  The share of the unemployed who have been without a job for more than 27 weeks (i.e., roughly the duration of regular unemployment benefits) has increased significantly, and as of January stood at a record high 41.2% of the total unemployed population, as seen in the chart below. 

 

 

…Because the duration of unemployment has lengthened significantly.  The share of the unemployed who have been without a job for more than 27 weeks (i.e., roughly the duration of regular unemployment benefits) has increased significantly, and as of January stood at a record high 41.2% of the total unemployed population, as seen in the chart below. 

 

 

As benefits expire, unemployed workers will begin to seek work more aggressively….  A study by Alan B. Krueger and Andreas Muller indicates that an unemployed worker can spend as little as 20 minutes per day looking for work during the middle of the UI benefit period, but increases this to more than 70 minutes per day when the benefit is about to expire (see Krueger and Muller, “Job Search and Unemployment Insurance: New Evidence from Time Use Data,” IZA Discussion Paper No. 3667, August 2008).  Because the benefit period has been expanded three times  since 2008, this effect may be more pronounced today than during more normal periods.  For instance, another study has found that unemployment spells have an elasticity of 0.16, implying that the current policy, which has extended benefits from 26 weeks to up to 99 weeks has increased the average duration of unemployment spells by up to 12 weeks (see Lawrence F. Katz and Bruce D. Meyer, “The Impact of the Potential Duration of Unemployment Benefits on the Duration of Unemployment,” NBER Working Paper 2741, July 1990). While this is probably an extreme interpretation of their results, given that the average duration of unemployment in January was 30 weeks, it does stand to reason that generous unemployment benefits may be one factor in the rising average duration of unemployment.
 
...But the lack of benefits will cut into their incomes until they find work.    Assuming something on the order of 400,000 exhaustions per month, at an average benefit of $1200 per month, this implies roughly $0.5 billion in lost monthly compensation compared with a scenario in which there are no exhaustions.  If the relationship between exhaustions and initial claims 16 to 17 months prior (the maximum benefit period in most states) holds constant, the pace of exhaustions is likely to stay elevated for several months, implying several billion dollars in cumulative lost compensation.

Congress may come under pressure to expand the benefit period once again.   Of course, this assumes that Congress will not add additional weeks to the benefit period once more, as they did in July and November 2008, and again in November 2009.   It is certainly possible that they will extend the benefit period again, but as fiscal considerations become more important, further expansions become more difficult. That said, at a minimum we expect Congress to continue renewing the current maximum benefit period through 2012, given that previous expanded benefits have been renewed for at least a year after the unemployment rate peaks.  Indeed, we expect unemployment and related health benefits to constitute the bulk of the additional stimulus spending we expect Congress to approve.