North Carolina's Employment Record: What Role Did Unemployment Insurance Reform Play?

Abstract

In 2013, the state of North Carolina reformed its state Unemployment Insurance (UI) program by reducing the maximum number of payment weeks and reducing the maximum weekly insurance payment. This paper investigates two hypotheses associated with such reform. The first hypothesis is a moral-hazard argument: limiting or removing UI payments should boost job search effort by the unemployed and lead to more rapid return to employment. The second hypothesis is a labor-force participation incentive: given the job-search requirement for receiving UI payments, limiting or removing those payments should reduce those actively unemployed and increase those who exit the labor force. I use panel data created from the Current Population Survey to create time-varying transition probabilities between employed, unemployed and non-participating labor status for individuals aged 25-54. I test the difference in these transition probabilities for North Carolina against those for the rest of the US. Using an event study based on the implementation of UI reform in North Carolina, I find no evidence for the moral-hazard hypothesis but strong evidence of exit from the labor force in North Carolina associated with the UI reform. Simulations calibrated to historical North Carolina labor force statistics indicate that 80,000 workers transitioned from unemployment to non-participation at the time of the reform, while employment creation for the unemployed underperformed that in the rest of the US. I also consider the impact of this reform on employer behavior through analysis of job vacancies recorded by Help Wanted Online. The reform coincided with negative growth in help-wanted ads in North Carolina: this performance is a negative outlier in comparisons with the job-creation record in other United States. There is no indication that the reform triggered an increase in job creation.