Extending unemployment benefits puts an upward pressure on equilibrium wages, which induces lower vacancy posting by firms and consequently an increase in unemployment research finds.
Unemployment in the U.S. rose dramatically during the Great Recession and has remained at an unusually high level for a long time. The policy response involved an unprecedented extension of unemployment benefits with benefit duration rising from the usual 26 weeks to as long as 99 weeks. The motivation for this policy was to provide “income support for a vulnerable group after they have lost their jobs through no fault of their own” as well as “needed support for the fragile economy.”
“We exploit a policy discontinuity at U.S. state borders to identify the effects of unemployment insurance policies on unemployment” write Marcus Hagedorn, Fatih Karahan, Iourii Manovskii and Kurt Mitman in Unemployment Benefits and Unemployment in the Great Recession: The Role of Macro Effects (quotes to follow)
Our estimates imply that most of the persistent increase in unemployment during the Great Recession can be accounted for by the unprecedented extensions of unemployment benefit eligibility. In contrast to the existing recent literature that mainly focused on estimating the effects of benefit duration on job search and acceptance strategies of the unemployed—the micro effect—we focus on measuring the general equilibrium macro effect that operates primarily through the response of job creation to unemployment benefit extensions. We find that it is the latter effect that is very important quantitatively.
JMM – Editor’s Note:
Do you really think that the unemployment rate during the Great Recession would have been lower without UI ? Is that real economics ?
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