The Ups and Downs of a Dropping Unemployment Rate

In College Economics 101 (which I’ll admit was one of my favorite classes despite the risk of sounding like a nerd), one of the first things that we learned was that unemployment is a lagging indicator of a recession.  So generally speaking, it is one of the last aspects of the economy to recover after going through a recession like we did in 2008 and 2009.  We also learned that lower unemployment is good, which is pretty logical.  The reason looks like this to me:

So when I saw a headline that unemployment falling is having a negative impact on our state, it made me stop and scratch my head.

While the unemployment line in Michigan getting shorter is good news for many, about 10%, or 30,000 of the states’ long-term unemployed have lost their benefits because of this.  Wait, how can people going back to work cause others to lose their benefits?  It’s all in the fine print.

For new initial unemployment claims regular state unemployment benefits run for 20 weeks.  In addition, those who still have not found a job after 20 weeks can receive an extension from the federal government’s Emergency Unemployment Compensation fund for up to an additional 33 weeks.  The federal extended benefits program then provides another 20 weeks of unemployment benefits to those that exhaust even the 53 weeks of benefits without finding a job.

But (and there’s always a “but”) the state needs to meet a couple of requirements for their residents to qualify for those final 20 weeks of benefits.  First, the unemployment rate of the state has to be above 6.5% (Michigan is at 9.3% so no problem there).  However, the unemployment rate also needs to be 10% higher than the average total jobless rate for the same period in any of the last three years, or above 9.9% now.  As of January 28th Michigan does not meet the second requirement, resulting in this loss of aid to those people.

So, forget your textbook definitions.  Falling unemployment can be good in a lot of ways, but there is a downside too.  And when it comes to the jobless, that downside means the difference between getting some much-needed help and going it alone.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James.