Unemployed, stuck with the tab

After North Carolina’s unemployment rate decreased to 7.4 percent—the lowest rate in more than five years—this past November, Gov. McCrory proudly proclaimed that “the job trend continues to be positive for North Carolina families” as a result of the laws passed by the state legislature this past year. One of these laws, however, may have been more effective in persuading unemployed North Carolinians to drop out of the labor force than in providing them the job opportunities the state so fundamentally lacks.

With Session Law 2013-2, the legislature drastically overhauled the state’s unemployment system in an effort to repay the $2.58 billion the state borrowed from the federal government so as to provide North Carolinians unemployment benefits. Despite the state levying an annual tax on employers in order to fund its provision of benefits, Alexandra Forter Sirota, the director of the North Carolina Budget and Tax Center, reports that the “current crisis in the solvency of North Carolina’s unemployment insurance trust fund stems from state legislators’ decision to cut employer contributions to the fund in the 1990s.” Indeed, the state legislature reduced unemployment taxes levied on employers six times between 1992 and 2000. At one point, the state levied the lowest unemployment tax rate in the nation. By the onset of the Great Recession, the state’s unemployment insurance fund was inadequate in terms of providing enough benefits for the unemployed, hence the commencement of borrowing funds from the federal government.

The state’s persistent borrowing resulted in an annual increase in employers’ federal unemployment taxes that will continue until the $2.58 billion debt is fully repaid. Unwilling to wait the four years necessary to fully repay the debt, the governor and the state legislature acquiesced to reform which would significantly bear its brunt on the unemployed. Though S.L. 2013-2 slightly raises employers’ maximum unemployment tax rate on earnings up to $20,900 from 5.7 to 5.76 percent and levies a 0.06 percent tax on employers who had previously not paid into the state’s unemployment insurance fund, its remaining implications are much more significant. The law reduces the maximum unemployment benefit provision from $535 to $350 per week and the length of benefit provision from 26 weeks to a sliding scale of 12 to 20 weeks and effectively eliminates federally funded emergency unemployment benefits—those provided after the first 26 weeks to over 170,000 North Carolinians—and benefits for employees who accept a family or medical leave of absence. “Cutting benefits would accelerate repayment of the debt by reducing the amount of future payouts,” writes the Raleigh News and Observer’s David Ranii. As a result, the state’s debt is expected to be repaid by late 2015, three years earlier than if the law had not been enacted.

The rationale for such drastic changes lies not in the explanation that the state’s debt will be repaid by next year, rather than in the next four, but in the unfortunate belief that reducing unemployment benefits will aid in the state’s overall employment effort. “Give people incentives to stay home, many will stay home,” writes Jim Tynen for the Civitas Review. “Give them incentives to work, and many will work,” he continues. Such an observation, however, falls short of the state’s economic reality.

Andrew C. Brod, a senior research fellow at the University of North Carolina at Greensboro’s Center for Business and Economic Research, recently noted that, if the state’s labor force was as large as it was last year, the state’s current unemployment rate would be 9.5, not 7.4, percent. Harvard University’s Elisabeth Allison Professor of Economics, Lawrence Katz, found that 95 percent of the decrease in the state’s unemployment rate is attributable to citizens dropping out of the workforce, while Allan Freyer, a public policy analyst with the North Carolina Budget and Tax Center, discovered that, “in 11 of 14 of the state’s metro areas, the drop in the unemployment rate between November 2012 and November 2013 was driven by discouraged workers giving up on finding jobs and dropping out of the labor force altogether and not by large-scale employment growth.” The state is experiencing the largest workforce reduction it has ever witnessed, with 77,000 fewer civilians working, or searching for work, last October than a year ago. “North Carolina’s labor force drop has been much larger than the national change,” writes the New York Times’ Paul Krugman. In North Carolina, “some of the unemployed [continue] to search for work,” he explains, “because such search is a requirement for those collecting benefits. Take away the benefits,” he continues, “and they drop out.”

The reform of the state’s unemployment insurance, notes Patrick Conway, chairman of the department of economics at the University of North Carolina at Chapel Hill, is the primary explanation for what Gov. McCrory calls a positive job trend. Significantly reducing the length and amount of unemployment benefit provision, rather than compel employers to account for the reduced tax rate that they benefited from since the 1990s, will return 50,000 North Carolinians and 12,500 children, to a state of poverty. Such reform will render the state the first to become ineligible for $780 million in extended federal unemployment benefits, which assist nearly 170,000 unemployed North Carolinians.

“Now you might think that business—having benefited from years of tax cuts that got us in this fix in the first place—might have agreed to shoulder most of the cost of the fix,” writes the Raleigh News and Observer’s Rob Christensen, “but business said no, that would hurt the economy. Business has all the high-priced lobbyists and bankrolls most of the legislators’ campaigns,” he continues.

“The unemployed have virtually no voice in the legislature. So they get stuck with the tab.”