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Extending UI benefits has no effect on the rate of job finding finds a FRBSF Research

“Compared with other advanced industrial countries, the United States is among the least generous with respect to the duration and level of unemployment insurance (UI) benefits. Under normal economic circumstances, UI benefits in the United States are available for up to six months following job loss, compared with availability of a year or longer in many European countries” write Henry S. Farber and  Robert G. Valletta in Do Extended Unemployment Benefits Lengthen Unemployment Spells? Evidence from Recent Cycles in the U.S. Labor Market (Adapted chosen excerpts by Job Market Monitor to follow).

In response to the severe labor market downturn associated with “The Great Recession” of 2007-09, however, UI benefit availability was successively extended in the United States, reaching a maximum duration of 99 weeks as of late 2009 and continuing into 2012. This unprecedented expansion of UI availability has been the subject of intense policy debate, which has largely revolved around the incentive effects of UI payments on job search and prolonged labor force attachment.

UI benefits are normally available for 26 weeks in the United States under the joint federal- state Unemployment Compensation (UC) program established under the Social Security Act of 1935. Unemployed individuals are eligible to receive benefits if they lost a job through no fault of their own (typically a permanent or temporary layoff) and they meet state-specific minimum requirements regarding work history and wages during the 12 to 15 month period preceding job loss. Availability for work and active job search typically are required for ongoing receipt of UI benefits, although the exact rules vary across states.

Normal UI benefits periodically are supplemented and extended during episodes of economic distress, through a combination of permanent and temporary legislation.

The federal Extended Benefits (EB) program, permanently authorized beginning in 1970, provides up to 20 weeks of additional unemployment compensation for unemployed individuals who lost jobs in states where the level and change in the state unemployment rate is above a specified threshold. The thresholds or triggers are state specific but most commonly are based on an overall unemployment rate of 6.5 percent (for a 13-week extension) or 8.0 percent (for 20 weeks), combined with a 10-percent increase in the unemployment rate over the previous two years. The EB program has been supplemented by temporary programs that have been used eight times since 1958, with the most recent episode beginning in 2008. We focus on the two episodes of UI extensions since 2002.3

The severity of job loss and persistent labor market weakness during and after the re-cession of 2007-2009 resulted in an unprecedented expansion of UI benefit availability and takeup. Between mid-2008 and late 2009 a set of expansions resulted in availability of UI benefits up to a maximum of 99 weeks in many states. A similar but much more limited extension of UI benefits occurred through the Temporary Extension of Unemployment Compensation (TEUC) legislation that was effective from March 2002 through early 2004. A maximum of 72 weeks of total benefits were phased in during this period.

Figure 1 illustrates the variation in eligibility for extended UI over time (years 2000-2012) based on the various programs in effect. Panel A displays the maximum and minimum number of total UI weeks available across states.

Capture d’écran 2013-05-16 à 13.55.19

Figure 2 illustrates the expansion of UI receipt during the recent recession and subsequent reduction as the labor market recovery has proceeded. The weekly flow of new UI claims peaked at about 660 thousand in early 2009 (slightly below the peak of nearly 700 thousand reached in late 1982; not shown). As of early 2013, new UI claims had declined to nearly their pre-recession level. In addition to the weekly flow of new UI claims, two series for the level of ongoing UI claims are displayed in figure 2: 1) regular UI claims (26 or fewer weeks) and 2) regular UI claims plus UI claims available through extensions. The level of both series has declined by about half since peaking in late 2009 and early 2010. The sharp, temporary drop in mid-2010 corresponds to the suspension period of June-July 2010. A much smaller but still substantial number of extended claimants also were present during the earlier episode of UI extensions during 2002-2004.

Capture d’écran 2013-05-16 à 13.57.31

The authors exploit variation in the timing and size of UI benefit extensions across states to estimate the overall impact of these extensions on unemployment duration, comparing the experience with the prior extension of benefits (up to 72 weeks) during the much milder downturn in the early 2000s.

The authors found small but statistically significant reductions in unemployment exits and small increases in unemployment durations arising from both sets of UI extensions. The magnitude of these overall effects is similar across the two episodes.

Their estimates suggest that extending unemployment insurance benefits in weak labor markets has virtually no effect on the rate of job finding but that, on average, unemploy- ment spells are somewhat longer as a subset of UI recipients remain nominally unemployed rather than exit the labor force. In addition to these limited implications for economic effi- ciency, we find only small impacts on the aggregate labor market. We estimate that extended UI increased the overall unemployment rate by only about 0.4 percentage points in the recent episode, which is small in comparison with the peak unemployment rate of 10 percent.

They find that the effect on exit from unemployment occurs primarily through a reduc- tion in labor force exits rather than through exit to employment (job finding). This is important because it implies that extended benefits do not delay the time to re-employment substantially and so do not have large first-order efficiency consequences. The major effect of extended benefits is redistributive, providing income to job losers who would have exited the labor force otherwise.

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