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The Effects Of Extended Unemployment Insurance Over The Business Cycle: Evidence From Regression Discontinuity Estimates Over Twenty Years

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Author Info

  • Johannes F. Schmieder†

    ()
    (Department of Economics, Boston University and IZA)

  • Till von Wachter

    ()
    (Columbia University,NBER, CEPR, and IZA)

  • Stefan Bender

    ()
    (Institute for Employment Research (IAB))

Abstract

One goal of extending the duration of unemployment insurance (UI) in recessions is to increase UI coverage in the face of longer unemployment spells. Although it is a common concern that such extensions may themselves raise nonemployment durations, it is not known how recessions would affect the magnitude of this moral hazard. To obtain causal estimates of the differential effects of UI in booms and recessions, this paper exploits the fact that, in Germany, potential UI benefit duration is a function of exact age which is itself invariant over the business cycle. We implement a regression discontinuity design separately for twenty years and correlate our estimates with measures of the business cycle. We find that the nonemployment effects of a month of additional UI benefits are, at best, somewhat declining in recessions. Yet, the UI exhaustion rate, and therefore the additional coverage provided by UI extensions, rises substantially during a downturn. The ratio of these two effects represents the nonemployment response of workers weighted by the probability of being affected by UI extensions. Hence, our results imply that the effective moral hazard effect of UI extensions is significantly lower in recessions than in booms. Using a model of job search with liquidity constraints, we also find that, in the absence of market-wide effects, the net social benefits from UI extensions can be expressed either directly in terms of the exhaustion rate and the nonemployment effect of UI durations, or as a declining function of our measure of effective moral hazard.

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Bibliographic Info

Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2011-063.

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Length: 51 pages
Date of creation: Jan 2011
Date of revision:
Handle: RePEc:bos:wpaper:wp2011-063

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References

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  1. Caliendo, Marco & Tatsiramos, Konstantinos & Uhlendorff, Arne, 2009. "Benefit Duration, Unemployment Duration and Job Match Quality: A Regression-Discontinuity Approach," IZA Discussion Papers 4670, Institute for the Study of Labor (IZA).
  2. Rafael Lalive, 2006. "How do Extended Benefits affect Unemployment Duration? A Regression Discontinuity Approach," IEW - Working Papers 294, Institute for Empirical Research in Economics - University of Zurich.
  3. Michael T. Kiley, 2003. "How should unemployment benefits respond to the business cycle?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2003-01, Board of Governors of the Federal Reserve System (U.S.).
  4. Martin Browning & Thomas Crossley, 1996. "Unemployment Insurance Benefit Levels and Consumption Changes," Discussion Papers 96-11, University of Copenhagen. Department of Economics.
  5. Jesse Rothstein, 2011. "Unemployment Insurance and Job Search in the Great Recession," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 43(2 (Fall)), pages 143-213.
  6. Moffitt, Robert, 1985. "Unemployment insurance and the distribution of unemployment spells," Journal of Econometrics, Elsevier, Elsevier, vol. 28(1), pages 85-101, April.
  7. David S. Lee & David Card, 2006. "Regression Discontinuity Inference with Specification Error," NBER Technical Working Papers 0322, National Bureau of Economic Research, Inc.
  8. Chetty, Raj, 2008. "Moral Hazard versus Liquidity and Optimal Unemployment Insurance," Scholarly Articles 9751256, Harvard University Department of Economics.
  9. Camille Landais & Pascal Michaillat & Emmanuel Saez, 2010. "Optimal Unemployment Insurance over the Business Cycle," NBER Working Papers 16526, National Bureau of Economic Research, Inc.
  10. Sanchez, Juan M., 2006. "Optimal State-Contingent Unemployment Insurance," MPRA Paper 2535, University Library of Munich, Germany.
  11. Wilke, Ralf A. & Lo, Simon M. S. & Arntz, Melanie, 2007. "Bounds Analysis of Competing Risks: A Nonparametric Evaluation of the Effect of Unemployment Benefits on Imigration in Germany," ZEW Discussion Papers 07-049, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  12. Raj Chetty, 2008. "Erratum: Moral Hazard versus Liquidity and Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 116(6), pages 1197-1197, December.
  13. David Card & Raj Chetty & Andrea Weber, 2007. "Cash-On-Hand and Competing Models of Intertemporal Behavior: New Evidence from the Labor Market," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 122(4), pages 1511-1560, November.
  14. Wilke, Ralf A., 2004. "New Estimates of the Duration and Risk of Unemployment for West-Germany," ZEW Discussion Papers 04-26, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  15. Till von Wachter & Jae Song & Joyce Manchester, 2008. "Long-Term Earnings Losses due to Job Separation During the 1982 Recession: An Analysis Using Longitudinal Administrative Data from 1974 to 2004," Discussion Papers, Columbia University, Department of Economics 0708-16, Columbia University, Department of Economics.
  16. Pavoni, Nicola, 2007. "On optimal unemployment compensation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(6), pages 1612-1630, September.
  17. McCrary, Justin, 2008. "Manipulation of the running variable in the regression discontinuity design: A density test," Journal of Econometrics, Elsevier, Elsevier, vol. 142(2), pages 698-714, February.
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Cited by:
  1. Bassanini, Andrea & Garnero, Andrea, 2012. "Dismissal Protection and Worker Flows in OECD Countries: Evidence from Cross-Country/Cross-Industry Data," IZA Discussion Papers 6535, Institute for the Study of Labor (IZA).
  2. Camille Landais & Pascal Michaillat & Emmanuel Saez, 2010. "Optimal unemployment insurance over the business cycle," LSE Research Online Documents on Economics 35596, London School of Economics and Political Science, LSE Library.
  3. Lo, Simon M.S. & Stephan, Gesine & Wilke, Ralf, 2012. "Estimating the Latent Effect of Unemployment Benefits on Unemployment Duration," IZA Discussion Papers 6650, Institute for the Study of Labor (IZA).
  4. Bart Hobijn & Aysegül Sahin, 2012. "Beveridge curve shifts across countries since the Great Recession," Working Paper Series 2012-24, Federal Reserve Bank of San Francisco.
  5. Richard Fabling & David C. Maré, 2012. "Cyclical Labour Market Adjustment in New Zealand: The Response of Firms to the Global Financial Crisis and its Implications for Workers," Working Papers, Motu Economic and Public Policy Research 12_04, Motu Economic and Public Policy Research.
  6. Røed, Knut, 2012. "Active Unemployment Insurance," IZA Policy Papers 41, Institute for the Study of Labor (IZA).
  7. Valletta, Robert G., 2014. "Recent Extensions of U.S. Unemployment Benefits: Search Responses in Alternative Labor Market States," IZA Discussion Papers 8247, Institute for the Study of Labor (IZA).
  8. Kory Kroft & Matthew J. Notowidigdo, 2011. "Should Unemployment Insurance Vary With the Unemployment Rate? Theory and Evidence," NBER Working Papers 17173, National Bureau of Economic Research, Inc.
  9. Pollak, Andreas, 2013. "Employment Insurance and the Business Cycle," MPRA Paper 49358, University Library of Munich, Germany.
  10. De Groot, Nynke & van der Klaauw, Bas, 2014. "The Effects of Reducing the Entitlement Period to Unemployment Insurance Benefits," IZA Discussion Papers 8336, Institute for the Study of Labor (IZA).
  11. Johannes F. Schmieder & Till von Wachter & Stefan Bender, 2011. "The Longterm Effects of UI Extensions on Employment," Boston University - Department of Economics - Working Papers Series, Boston University - Department of Economics WP2011-064, Boston University - Department of Economics.
  12. Pietro Tebaldi & Matthew Jackson, 2014. "A Forest Fire Theory of Recessions and Unemployment," 2014 Meeting Papers, Society for Economic Dynamics 120, Society for Economic Dynamics.
  13. François Gerard & Gustavo Gonzaga, 2011. "Unemployment Insurance in Developing Countries: The Case of Brazil," Textos para discussão 593, Department of Economics PUC-Rio (Brazil).

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