Academic Literature

US – Unemployed job losers have low rates of transition out of the labor force until their duration of unemployment ends FRB finds

Economists often expect unemployment insurance (UI) benefits to elevate unemployment rates because recipients may choose to remain unemployed—instead of accepting jobs or dropping out of the labor force—in order to continue receiving benefits. Researchers have attempted to quantify the effect of UI benefit availability on the unemployed ranks and on the U.S. unemployment rate. The federal extensions of available weeks of UI in the recent recession and recovery to date—Emergency Unemployment Compensation 2008 (EUC08) and the Extended Benefits (EB) program—have augmented interest in this issue, and have provided fresh data with which to investigate these questions.

This paper uses individual data from the Current Population Survey between 2005 and 2013 to investigate the influence of program changes in the UI system on the monthly transition rates of unemployed individuals from unemployment to out of the labor force and from unemployment to employment, as compared with staying unemployed. The main findings are as follows:

  • Unemployed job losers have low rates of transition out of the labor force until their duration of unemployment approaches the maximum available months of UI benefits in their state at that time.
  • Further, the transitions from unemployment to out of the labor force are greater in the month after UI benefits are exhausted and thereafter than in the month of exhaustion or the month before exhaustion.
  • There is no discernible relationship between emergency and extended (E/E) UI availability and transitions from unemployment to employment.

These patterns are consistent with the view that during the Great Recession and recovery to date, many job losers continued to look for work, did not succeed in finding jobs, and kept their status as “unemployed” until their benefits were exhausted, after which they gradually dropped out of the labor force.

These findings imply that the longer periods of benefit eligibility under the federal programs EUC08 and EB—up to 99 weeks in many states in 2011 and 2012—contributed to the elevated jobless rates observed during that period, but not via lower employment. By the same token, the sharp contraction of benefit weeks that occurred in 2012 and continued more gradually in 2013 likely contributed to declines in unemployment and participation rates beyond what one would expect based on the improving economy alone. Similarly, the December 28, 2013 sudden cutoff of federal UI payments to an estimated 1.3 million jobless Americans who had been looking for work for more than six months is adding to the pace of transitions from unemployment to dropping out of the labor force, thus reducing the unemployment rate and the labor force participation rate further in the first half of 2014, although very modestly.

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via Labor Market Transitions and the Availability of Unemployment Insurance – Boston Fed.

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