Long-term unemployment insurance is all but dead. Congress will take up the issue again after it returns from the recess that begins Friday, but even if a bill passes the Senate (where it failed twice on Tuesday), it's probably dead on arrival in the Republican-controlled House.
How could Congress fail to address perhaps the most important economic issue of the day? Democrats rightly blame Republicans. All but a handful of GOPers oppose renewing the extended benefits—which were created as an emergency measure during the depth of the recession—on the grounds that the program boosts the deficit and breeds a culture of dependency.
But both parties stand to gain something politically if the benefits are not restored (they expired in late December), even as people who have been out of work for a long time get screwed.
Here's why: Cutting off the benefits will almost certainly cause the unemployment rate to drop. When it does, Republicans will feel ideologically vindicated, while Democrats will have some good economic news to sell to voters ahead of the 2014 election.
There are two forces that push down the unemployment rate when benefits expire, and while economists aren't exactly sure how much responsibility to assign to either, the outcome is the same either way.
The first explanation is that people collecting benefits get off the dole and find jobs. "You do a disservice to these workers. When you allow people to be on unemployment insurance for 99 weeks, you're causing them to become part of this perpetual unemployed group," Sen. Rand Paul said on Fox News in early December. The idea is that people collecting benefits who have been holding out for a better job will now take whatever they can get.
The more likely explanation is the alternative, which assumes that many of the people who lose their benefits will get discouraged and give up on finding a job. Because the government counts people as unemployed only if they are currently looking for work, there will suddenly be a lot fewer unemployed people, at least in the eyes of the official statistics.
Remember, these people have been out of work for a very long time, and numerous studies suggest that many of them will simply not be able to find jobs, no matter how hard they try, thanks to employer discrimination and poor job prospects. Many recipients may have kept up their job search—and thus continued to get counted as "unemployed"—only because they're required to do so in order to collect unemployment-insurance benefits.
"Both of these forces bring down the unemployment rate, but for very different reasons," said Aaron Chatterji, who teaches at Duke University's business school and previously served as a senior economist in the White House Council of Economic Advisers.
Michael Feroli, the chief U.S. economist for JPMorgan Chase, estimated that the "lapsing of [extended unemployment compensation] could lower the unemployment rate by perhaps 0.25%-0.50%-pt, with much of the effect coming through reduced labor force participation, rather than increased employment." Goldman Sachs says the drop could be as high as 0.8 percentage points if all 1.3 million Americans who are expected to lose their benefits give up looking for a new job.
Chatterji's state provides a natural experiment. Back in July, North Carolina's GOP-controlled legislature cut the maximum length of long-term unemployment benefits, and reduced the size of weekly checks, presaging what will happen nationally if Congress continues to sit on its hands. Since then, the unemployment rate in North Carolina has fallen by about 1.5 percentage points to a five-year low.
At the same time, North Carolina saw its biggest drop ever in workforce participation, suggesting that most of the explanation for the drop is that people just quit looking for work, as Evan Soltas explained for Bloomberg. It's important to determine why cutting benefits pushed the rate down, but there's little doubt that it did.
And here's how politicians from both parties can win politically, even as the unemployed lose.
For Republicans, the drop in the unemployment rate gets touted as proof of their anti-safety net worldview. "More people got off unemployment and either got jobs or moved back to where they were going or came from," North Carolina Gov. Pat McCrory said last weekend when asked why his state's unemployment rate dropped.
That's no help to Tar Heel Democrats, who have been relegated to the governing minority. But nationally, if the trend follows, then the White House and congressional Democrats can point to the falling unemployment rate as evidence that their shepherding of the economic recovery for the past five years has been successful. And the drop in the rate would happen just as candidates are gearing up for the election.
So far, Democrats don't seem to be taking that bait. They desperately want to pass an extension of unemployment benefits for more important reasons (you know, helping people). But if and when that effort fails, there's at least a political silver lining for them waiting—as long as they're willing to paper over the fact that the workforce participation rate has fallen dangerously along with the unemployment rate.
Meanwhile, the long-term unemployed are worse off than ever.