Does Cutting Unemployment Benefits Increase the Supply of Labor?

by Fred Siegmund

A Washington Post article (“N.C. looks to cut jobless benefits” 2/13/13) describes cuts in unemployment benefits as a drastic proposal from North Carolina lawmakers. Under the new plan, benefits would drop from 26 weeks to 20 and the maximum benefits from $535 a week to $350.

The governor believes they have little choice because they have a budget crisis. But the quotations from business supporters give another reason: cuts are needed to improve the economic climate and rebuild unemployment insurance funds. Lew Ebert, the president of the North Carolina Chamber of Commerce, told journalist Michael Fletcher, “Everywhere I travel, there are companies that have jobs and want to hire, but I hear two things: people don’t have the skills, or that it is tough to compete with $500 plus per week in benefits.”

Unemployment benefits are always competition for employers while the unemployed receive benefits. Therefore, the duration and amount of the benefits reflect a state’s political attitude and policy toward cheap labor. If benefits are $535 per week for 26 weeks, then the unemployed have incentive to stay on unemployment for wages under $13.37 an hour and for the whole 26 weeks. They will be unlikely to become a part of the labor force until after 26 weeks unless an offer comes above $13.37, assuming a 40-hour week. If the benefits are $350 per week for 20 weeks, then the unemployed have incentive to stay on unemployment, but only for wages under $8.75 an hour for 20 weeks.

By lowering the benefits, North Carolina will, as they intend to do, increase the supply of cheap labor. However, $350 is the maximum when few make the maximum. Benefits are always scaled back for filers who had lower wages than those eligible for the maximum. The article cites $296 a week as the average benefit, which is $7.40 an hour. The Bureau of Labor Statistics reports the median wage for cashiers was $8.80 an hour in 2011.

At $7.40 an hour, we can be sure the Chamber of Commerce has jobs, as their president told the Washington Post, but only if the Legislature will help them to hire at lower wages.

About the author: Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at

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