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

Tony Fratto|Managing Partner, Hamilton Place Strategies
Friday, 2 Sep 2011 | 11:49 AM ET

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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