Krugman outlines how the state of North Carolina cutting unemployment benefits has completely failed to encourage people back into the workforce:
The idea behind cutting benefits is that we are “paying people to be unemployed”, and that tough love will force them to go out and create jobs. It’s never explained exactly how greater desperation on the part of the unemployed will, in fact, lead to higher overall employment. Still, you could imagine that an individual state might gain some competitive advantage against other states by cutting wages. What you actually see in North Carolina, however, is nothing....
The unemployment rate did fall — but this was due to a large drop in the labor force, as the number of people looking for work fell. Why? Well, a likely explanation is that some of the unemployed continued to search for work, and were therefore counted in the labor force, despite low prospects of finding a job in a depressed economy, because such search is a requirement for those collecting benefits. Take away the benefits, and they drop out.
[I]f there were anything to the theory that cutting unemployment benefits encourages job search and somehow translates into higher employment even in a slump, harsh policies should work better at the state than at the national level. But there is no sign at all that North Carolina’s harshness has done anything except make the lives of the unemployed even more miserable.
I've asked some friends in Raleigh and Charlotte for comment.