The U.S. unemployment rate could fall substantially early next year as belt-tightening in Washington throws more than a million long-term unemployed Americans off the benefit rolls.
The loss of benefits could spur former recipients to either drop out of the labor force or accept jobs they previously would not have considered. Some economists estimate this could lower the current unemployment rate of 7.3 percent by as much as half a percentage point.
"The lapsing of the program could lower the unemployment rate by perhaps 0.25-0.50 percentage point, with much of the effect coming through reduced labor force participation, rather than increased employment," said Michael Feroli, an economist at JPMorgan in New York.
To receive jobless benefits, Americans are required to be actively looking for work. That is also a key factor that defines who is unemployed, as opposed to those who have dropped out of the labor force.
Emergency jobless benefits for 1.3 million long-term unemployed people are set to run out on Jan. 1 unless the U.S. Congress agrees on an extension.
The National Employment Law Project, a New York-based advocacy group, estimates that about 850,000 people will run out of state unemployment benefits in the first quarter of 2014, with no access to emergency benefits if lawmakers do not act.
The emergency unemployment compensation program was introduced in 2008 during the depths of recession, and has been extended every year since then. It has paid out more than $225 billion to cushion the long-term unemployed as the economy struggled to heal from the recession.
President Barack Obama and his fellow Democrats want to include an extension of the program in any budget deal hammered out by a bipartisan panel. A negotiating panel has been given a Dec. 13 deadline to reach a deal to fund the government.
With little time left, and opposition to an extension among some Republicans, analysts say it appears likely the emergency benefits will expire as scheduled on Jan. 1.
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