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Why a Better Jobless Rate Hurts Jobless and Economy

Michael Nagle | Bloomberg | Getty Images

Elizabeth Waldrop lost her medical management job nearly two years ago in a personnel shuffle. The 47-year-old Chicagoan had been receiving unemployment benefits, getting some financial support from her boyfriend and looking for work.

But the benefits ran out in October and that brought on what she called one of the toughest times of her life.

"Facing the end of my benefits felt like I was jumping off a cliff without a parachute," said Waldrop, who recently moved to Colorado to start her own interior design business after selling her personal possessions and using what little money she had left.

"I just figured it was better to try and do something I loved than have those personal things," said Waldrop. "And I didn't have much choice."

Waldrop is part of an ongoing paradox when it comes to the nation's unemployment picture. As the jobless rate inches down ever so slowly — and more people find work — they're actually hurting the people still without jobs.

That's because under seemingly contrary rules, states can only offer extended unemployment benefits if their jobless rate goes up year after year. States like California, Rhode Island, Nevada and Waldrop's Illinois still have high unemployment rates, but they have remained steady the past three years, and extended benefits for people in those states ended this summer.

While the federal government doesn't officially track what happens to people who have lost their benefits, the Government Accountability Office estimates that some 5.5 million workers have exhausted their state and federal unemployment benefits from 2007 to 2011. In 2012 alone, more than 500,000 people—some 100,000 in California—have also been estimated to have maxed out their benefits.

With the average benefit check is only around $300 a week—and benefits have run up to 99 weeks—the fact that so many people are no longer getting them hurts the overall economy, say analysts.

"The best evidence is that unemployment benefits affect the economy," said Gregory Price, professor of economics at Morehouse College. "For each dollar spent on benefits, they carry more than another dollar in spending. If you cut those things back, it can hurt economic growth."

Those who have exhausted their benefits have few options. These include government job training and placement programs and the ability to buy health insurance — the COBRA program. But without a paycheck or unemployment funds, something like COBRA — which costs $400 a month for an individual — is out of reach for most of the jobless, say analysts.

"One of the hidden aspects of this is the pressure on Medicaid," said Farrokh Hormozi, an economist and professor at Pace University. "People are going to get sick and because of that, without any health insurance, it puts more pressure on social networks like Medicaid."

"Many people have to max out their savings or depend on relatives and friends to help them out," said Chad Stone, chief economist at the Center on Budget and Policy Priorities. "And more have to turn to federal programs like food stamps to survive. It's not a pretty picture."

The picture could get worse in the battle over the "fiscal cliff." Without a deal, all federal extended unemployment benefits are scheduled to end on Dec. 31, cutting off an estimated 2 million people. A million others could see their benefits disappear by April. (Read more: States and 'Fiscal Cliff')

According to a Congressional Budget Office report, extending the benefits—at a cost of some $30 billion to the government—would lead employers to create 300,000 new jobs from the spending and improve the gross domestic product by some 0.2 percent.

Besides providing the out of work with basic funds, the benefits offer some reason for getting up in the morning, said one analyst.

"People are definitely at risk if they lost their benefits of becoming discouraged from looking for work," said Jason Bent, an employment law expert at Stetson University College of Law. "There's some argument that unemployment benefits keep people from getting jobs or looking for work. But unemployment does not take care of people. It's just really designed to be a transition. And most people are looking for work. "

The only solution is more jobs, said Price.

"We have to hope the job picture gets better in the near future," Price said. "This labor pull back is the worst since World War II. We have to hope it improves."

For Waldrop, hoping was no longer an option.

"I had 20 years of experience in big pharma and medical management, but my getting let go turned me off to corporate America," said Waldrop. "I moved to Colorado to take my father's advice: Follow your creativity and create your own job."


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