Unemployment Benefits Ending Sooner Than Expected for Many

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Unemployment lineOn May 12, displaced workers in eight states lost their unemployment benefits -- anywhere from 13 to 20 weeks earlier than expected. That brought the total number of workers who have prematurely lost their benefits so far this year to 400,000 in 27 states, and next month, 70,000 more Americans will.

This is all happening despite Congress extending the long-term unemployment benefits program in February.

It Was Nice While It Lasted

After the financial crisis, the federal government pitched in to extend state unemployment benefits for up to 99 weeks. That added nearly an additional two years of benefits to the 26 weeks (roughly six months) of unemployment benefits states typically paid.

That program was set to expire in February. After a tough fight with the White House, Congress decided to extend benefits again, but this time with added restrictions that have led directly to the current state of affairs:

1. Going forward, the number of weeks of extended aid has been reduced.
2. It's now harder for states to get the maximum amount of federal aid.

To determine whether states qualify for ongoing support, the federal government looks at the state's unemployment rate over the past three months and compares it to that of three years ago. If the current average is at least 110% of what it was then, the state will qualify. If not, the state won't qualify.

Adding Insult to Injury

Those hardest hit by loss of benefits are those likely already in the worst shape -- the long-term unemployed. If you've completely exhausted your state benefits and the extended federal benefits, you've been unemployed for 125 weeks, or nearly two and a half years.

Unemployment hit 9.9% in November 2009 -- its recession level high -- and has since come down to 8.1%. And while the economy has been creating jobs, the official jobless rate has also fallen because many people stopped looking for work.

According to the Government Accountability Office, by January 2010, 2 million displaced workers exhausted their unemployment insurance. The Labor Department estimates another 3.5 million exhausted their benefits throughout 2010 and 2011.

Depending on the individual situation, running out of unemployment benefits can run the gamut from survivable hardship to outright tragedy.

But there's another drawback to mass numbers of people losing unemployment benefits that's often overlooked -- the negative effect on the economy.

This Affects You Even If You Have a Job

Right now, the U.S. is not in recession. As of the end of the most recent quarter, the economy was growing at an annual rate of 2.2%. While 2.2% growth is better than zero growth or negative growth, it's far from stellar. Our economy is in a very tentative recovery -- one that could potentially be derailed by even mild economic shocks.

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By putting money in people's pockets, unemployment insurance works as a kind of back-door fiscal stimulus. Almost without fail, money distributed as jobless benefits gets put right back into the economy -- spent on rent, mortgages, car payments, groceries, clothes -- anything people need to survive. That helps businesses, and the people they employ, to survive.

Removing this money could negatively affect America's economic recovery all on its own. Add this to the other items in the looming "fiscal cliff" -- a raft of spending cuts and tax increases all set to hit around the beginning of 2013 -- and you have a situation the Congressional Budget Office says will put the country back into recession in 2013.

The flip side to extending federal unemployment benefits even further is that it would be paid for by additional government debt, and the country doesn't need any more of that. But with both people's lives and the country's fledgling economic recovery hanging in the balance, it's a price that has to be considered.

John Grgurich is a regular contributor to The Motley Fool.
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