Will the Economy Suffer From Reduced Unemployment Benefits?

Unemployment

On November 27, JPMogan Chase (NYSE:JPM) released a notice of Global Data Watch’s findings on the impending end to extended unemployment benefits. And the findings are less then optimistic, with the research notice stating that “expiration of these benefits could lower labor force participation. This, in turn, would depress the unemployment rate, by perhaps 0.25 percent to 0.50 percent pt.”

The funding currently fueling the Emergency Unemployment Compensation program — the EUC — will run out on January 1. At present, the report says that EUC is supplying unemployment benefits for around 1.3 million individuals. While this is not the first time the funding has run dry, it is the first time it looks so likely to go without refunding from congress.

The report notes that unemployed individuals are more likely to remain in search of a job rather than leave the market if they are receiving benefits for continuing their search. They are also more likely to look for a higher paying job, as opposed to settling for a low wage out of desperation. Further, spending that would otherwise not occur from unemployed individuals could cease along with the benefits — meaning that the resultant economic benefit from consumers would also end.

Another positive effect from said benefits is that employers may be less likely create jobs if possible replacements are likely to demand a high wage from a place of fiscal security. The EUC was created in response to the 2008 financial crisis and recession and has shelled out somewhere between $20 to $25 billion annually in aid to those looking for employment beyond the usual six month period.

JP Morgan’s economic research report also qoutes researchers from the New York Federal Reserves who believe that job creation is limited because of extended benefits, but also find that reduced spending from unemployed individuals would cut spending by 0.4 percent for the annualized real GDP growth in the first quarter.

Here’s how the major U.S. equity indices traded on Monday:

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