US: Loss of Unemployment benefits

700,000 Are About To Lose Their Extended Jobless Claims Benefits

Zero Hedge,

20 April, 2012

While virtually everyone has opined on the topic of the massive fiscal "cliff" set to take place on January 1, 2013, which could crush US GDP unless American politicians manage to find a way to end their acrimonious ways, most forget that a far more tangible cliff is set to take place much sooner, specifically over the next several months, as those currently collecting handouts from the government in the form of extended unemployment benefits (i.e., those who have been out of a job for a year) are about to get as angry as Germants pre-funding TARGET3, once the free money stops. Goldman explains why: "First, more than 150,000 workers per month exhaust their allowed benefits. Second, recently legislated thresholds will reduce benefit eligibility in many states with below-average unemployment rates beginning in June. Third, apart from legislative changes, labor market improvement in some states has taken the state-level unemployment rate below eligibility thresholds, with many states looking at likely expiration of one or more tiers of benefits around mid-year." In other words, unlike the bulk of other transfer payment programs (read government subsides) which could be extended with the flick of a switch at the end of the year following the now traditional 1+ month congressional theatrical impasse, extended claims can not. The net result: by June some 700,000 people who are currently collecting benefits will lose everything. It seems that the old faithful EBT card is about to be denied- and while one can assume that extended benefits are not a core source of marginal aspirational product (read AAPL) sales, we all know the truth. Is the time finally coming to short the one company that is and has always been the primary beneficiary of government transfer payment largesse? Because if AAPL's recent shakiness has been, by some, attributed to the expiration of EBTs, what will happen when Americans are again forced to pay their mortgages?

Today's scary chart du jour: Legislated benefit cutoffs have started to take effect.

Goldman explains the reasons for this dramatic cliff:

Over the next several months, eligibility for federally funded jobless benefits will decline. This is due in part to legislative changes over the last few months, and in part to broader economic factors. In particular, there are three factors likely to contribute to reduced benefit eligibility and increased exhaustion of benefits over the coming year:

"Natural" exhaustion of emergency and extended benefits. The rate of benefit exhaustion has declined somewhat over the last year, but remains between 150,000 and 200,000 individuals per month on a three-month average basis, as shown in the first chart below. To estimate this, we consider "final payments" reported each month by the Department of Labor in the final two tiers of the Emergency Unemployment Compensation (EUC) program and in the Extended Benefits (EB) program, net of first payments in other benefit tiers that might feed into those programs (for instance, a worker who exhausts Tier 3 will receive a final payment from Tier 3 and a first payment from Tier 4).

The most recent legislative extension will soon phase out emergency benefits in states with lower unemployment rates. When Congress extended emergency benefits in February, the thresholds for states to qualify for more generous "tiers" of benefits were made more restrictive, as shown in the table below. Those changes begin to take effect in June.

EB and EUC have started to expire in some states, and will expire soon in most others. Federally funded extended benefits (EB) provide up to 20 weeks of benefits, generally after EUC has been exhausted. A state generally becomes eligible for these benefits when its unemployment rate is at least 6.5 percent and the three-month average unemployment rate is at least 10 percent greater than it was during the same three-month period in any of the previous two years. In late 2010, Congress extended this two year "look-back" period to three years, in order to avoid cutting off benefits in 2011. However, in the most recent extension passed by Congress in February, Congress did not extend the look-back period any further. With the national unemployment rate roughly equal to the rate in Q1 2009, few if any states will have unemployment rates at least 10 percent higher than in the comparable period in any of the last three years, and extended benefits will end in nearly every state. Some states have also lost eligibility for the third and fourth tier of EUC due to declining unemployment rates that have now fallen below the thresholds even before taking account of the recently legislated changes. In Q1, Tier 4 eligibility ended in four states, and it ends in an additional five states this month. Assuming that state unemployment rates hold roughly steady, it appears that this final tier of benefits will be available in only 11 states by Q4. We estimate Tier 3 benefits will be available in just over half the states in Q4.

The upshot is that by around August roughly 700,000 jobless workers will no longer qualify for benefits who would have otherwise qualified. The chart above shows the difference between the number of individuals who would receive benefits each month based on current policy compared with our projection of eligibility based on state-level unemployment rates.

And the consequences:

Reduction in income. Based on the cumulative reduction in benefit eligibility shown in the chart above, we estimate weekly benefits would be cut by a cumulative $6 billion over the course of the year.

Possible effect on initial claims. The possibility has been raised that expiration of benefit tiers has led to increased filings of initial claims, either in response to expiration or in a mistaken attempt to establish eligibility ahead of expiration (expansion of benefits in 2001 increased claims, for instance, though there have been no clear signs of this in the data over the last few years). To investigate this, we estimate a panel regression using the percentage change in each state's weekly claims rate from its four week average change and dummy variables for changes in each state's eligibility for Tier 3, Tier 4, and EB. The difficulty with the analysis is that before the last few weeks, very few states had lost eligibility for these programs. That said, we find that a state's loss of EB eligibility increases claims by 7% in the week following expiration. This implies a very small effect--less than 1,000 claims--on the claims data for the week ending April 14 (nine states went off of EB eligibility at the end of the prior week). If correct, it implies that upcoming expirations could have a slightly more important effect; another six states will come off EB benefits the week ending April 28, which could add a few thousand claims to that week's report. Since these should be short-lived effects, we do not see benefit expirations as a reason to expect high levels of claims, but it seems possible that expirations could add even more noise to weekly claims data.

Slight reduction in labor participation rate. Emergency and extended benefit programs paid benefits to 3.2 million unemployed workers at the end of March. As noted above, labor market improvement combined with recently legislated changes should result in a cumulative reduction of 700,000 workers collecting benefits through 2012. As Andrew Tilton noted a few months ago, extended benefits tend to increase the measured unemployment rate, through a combination of increased reported labor force participation and lower intensity of job search (see "The November Employment Report, and the Impact of Extended Jobless Benefits on the Unemployment Rate," US Daily, December 2, 2011). Averaging the effects of extended benefits on the unemployment rate reported in other studies implies that emergency benefits might add about 0.4 percentage point to the unemployment rate, mostly due to increased labor force participation. Since these exhaustions would reduce the number of individuals claiming benefits by around 20%, the effect would probably be worth only about 0.1 percentage point on the unemployment rate.

In other words: lower spending, more claims, but at least Obama's dream of showing a lower, or even negative (yes, it is absolutely possible if the participation rate drops below 58%) unemployment rate will come true. Too bad 700,000 more people will be living in a cave to see the inauguration.

Finally, from the conclusion:

At the end of 2012, benefits are scheduled under current law to expire altogether. Unlike previous scheduled expiration, where individuals would lose eligibility for benefits only after they exhausted their current "tier," the current policy would cease paying benefits at the end of the year with no phase-down). Our current assumption is that benefits will expire altogether at that point; this could occur because of an agreement between the parties to allow them to expire, but like other policies set to expire (the so-called "fiscal cliff"), benefits could also cease because Congress fails to agree on any of the fiscal choices it faces at the end of the year. An additional phase-down of benefits rather than outright extension is certainly possible as an alternative scenario.