12/19/2011 02:09 pm ET

If Payroll Tax Cut And Unemployment Benefits Are Not Extended, Labor Market Could Take Big Hit

As Congress jockeys over emergency stimulus measures that are set to expire soon, economists warned Monday that congressional inaction could spell further woes for the already sputtering economy, making an stagnant labor market even worse.

If Congress doesn't continue a payroll tax break for working Americans and extended unemployment benefits for the country's long-term jobless -- the two key measures being debated in Washington -- Americans could hold back on spending, crippling the consumer-driven economy.

"It's not just that Americans are going to have less funds available to spend, but people are also going to be more pessimistic," said Bernard Baumohl, chief global economist at The Economic Outlook Group. He warned of a vicious cycle of pessimism, sparked by what he calls concern over the "brinkmanship" in Washington, driving the economy downward.

"People are going to be more concerned about the economic outlook and likely cut back on spending even further," he said. "They'll see that the economy will be even closer to skirting recession."

If Congress doesn't reach an accord, employed people will see a larger slice of their paychecks going to payroll taxes, leaving them less to spend with -- the payroll tax break passed in late 2010 has meant savings of around $1,000 for those earning $50,000, according to estimates.

And as many as 1.8 million long-term jobless will lose their unemployment assistance in January if no compromise is reached, according to worker advocacy group the National Employment Law Project. Since 2008 workers laid off through no fault of their own have been eligible for extended benefits funded by the federal government after using up the state benefits, which usually last 26 weeks.

In an economy driven by consumer spending -- losing those two stimulus measures could make employers even more reluctant to hire.

"We're just seeing this recovery drag on and on and on, and this is going to make it drag on that much longer," said Dean Baker, co-director of the Center for Economic and Policy Research.

Economists expect losing the stimulus measures could hit the economy hard; estimates range from a loss of 0.7 to 1.1 percentage points in expected-GDP growth. The economy grew at an annual rate of 2 percent in the third quarter, and dropping of a full percentage point would be a significant loss.

Baker said he expected around 1.3 million jobs would be lost if both measures expire. The labor market is already lagging; 13.3 million Americans were officially unemployed last month, and millions more are either working part-time because they can't find full-time work or have left the labor force, giving up the job search entirely.

Economists reached by The Huffington Post asked the same question about Washington's current impasse: With growth already so slow and the stimulus measures already modest, why is this debate happening at all?

"Maybe we'll keep growing in spite of the withdrawal of spending power, but we're not growing very strongly as is," said Gary Burtless, an economist at the Brookings Institute. "Why put the recovery in peril?"

As Burtless sees it, the payroll tax cut extension is already an insufficient compromise. He, like many economists, says that there are more effective ways to stimulate the economy, such as a targeted tax cut that encourages employers to increase hiring or direct spending on public works projects.

"There are millions of worthy public projects that are better done than left undone, and a lot of unused skills that could be immediately put to work," he said, referencing the languishing construction industry, where employment levels still sit far below their pre-recession heights. "I'm more worried about the politics of what it takes to get those things done quickly."

The House is scheduled on Monday to take up the Senate bill, passed on Saturday, but House Speaker John Boehner (R-Ohio) said Monday he expects the House to reject the Senate-passed package.