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Fratto: Do Long-Term Unemployment Benefits Elevate the Unemployment Rate?

Every now and then an economic data chart just screams out for an explanation, and this chart below by the Dallas Fed is one of them:

As the chart shows, weekly initial claims for unemployment insurance are very tightly correlated with the unemployment rate – until mid-2009, that is, when the correlation breaks down in a fairly dramatic way. Reversion to mean would expect these data to eventually converge — either with a lower UI rate or higher weekly claims.

The question, of course, is why did the break occur?

One explanation could be the extension of emergency long-term unemployment insurance benefits to 99 weeks – a far longer extension of benefits than in any other previous recession. Another explanation is that we’re witnessing a structural shift to an elevated unemployment rate in the U.S.

These are fair questions for the U.S. Senate to put to Alan Krueger – a noted labor economist and President Obama’s nominee to chair the Council of Economic Advisors – when he appears for his confirmation hearings this fall.

Tony Fratto, is a Managing Partner at Hamilton Place Strategies, former Assistant Secretary at the U.S. Treasury Department, and a former White House official. He is also an on-air contributor for CNBC and founder of the policy discussion website rooseveltroom.net You can follow him on Twitter at http://twitter.com/TonyFratto.

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