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Do Extended Unemployment Benefits Lengthen Unemployment Spells? Evidence from Recent Cycles in the U.S. Labor Market

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Author Info

  • Farber, Henry

    ()
    (Princeton University)

  • Valletta, Robert G.

    ()
    (Federal Reserve Bank of San Francisco)

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    Abstract

    In response to the Great Recession and sustained labor market downturn, the availability of unemployment insurance (UI) benefits was extended to historical highs in the United States. We 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 during the much milder downturn in the early 2000s. Using monthly matched individual data from the U.S. Current Population Survey (CPS) for the periods 2000-2005 and 2007-2012, we estimate the effects of UI extensions on unemployment transitions and duration. We rely on individual variation in benefit availability based on the duration of unemployment spells and the length of UI benefits available in the state and month, conditional on state economic conditions and individual characteristics. We find a small but statistically significant reduction in the unemployment exit rate and a small increase in the expected duration of unemployment arising from both sets of UI extensions. The effect on exits and duration is primarily due to a reduction in exits from the labor force rather than a decrease in exits to employment (the job finding rate). The magnitude of the overall effect on exits and duration is similar across the two episodes of benefit extensions. Although the overall effect of UI extensions on exits from unemployment is small, it implies a substantial effect of extended benefits on the steady-state share of unemployment in the cross-section that is long-term.

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    Bibliographic Info

    Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7347.

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    Length: 44 pages
    Date of creation: Apr 2013
    Date of revision:
    Handle: RePEc:iza:izadps:dp7347

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    Keywords: unemployment; unemployment insurance; unemployment duration;

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    References

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    1. 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.
    2. Moffitt, Robert, 1985. "Unemployment insurance and the distribution of unemployment spells," Journal of Econometrics, Elsevier, Elsevier, vol. 28(1), pages 85-101, April.
    3. Rebecca M. Blank & David Card, 1989. "Recent Trends in Insured and Uninsured Unemployment: Is There an Explanation?," NBER Working Papers 2871, National Bureau of Economic Research, Inc.
    4. Camille Landais & Pascal Michaillat & Emmanuel Saez, 2010. "Optimal Unemployment Insurance over the Business Cycle," NBER Working Papers 16526, National Bureau of Economic Research, Inc.
    5. Abowd, John M & Zellner, Arnold, 1985. "Estimating Gross Labor-Force Flows," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 3(3), pages 254-83, June.
    6. 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.
    7. Chetty, Raj, 2008. "Moral Hazard versus Liquidity and Optimal Unemployment Insurance," Scholarly Articles 9751256, Harvard University Department of Economics.
    8. David Howell, Bert M. Azizoglu, 2011. "Unemployment Benefits and Work Incentives: The U.S. Labor Market in the Great Recession," SCEPA working paper series. SCEPA's main areas of research are macroeconomic policy, inequality and poverty, and globalization., Schwartz Center for Economic Policy Analysis (SCEPA), The New School 2011-7, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
    9. Kroft, Kory & Notowidigdo, Matthew J., 2012. "Should Unemployment Insurance Vary with the Unemployment Rate? Theory and Evidence," CLSSRN working papers, Vancouver School of Economics clsrn_admin-2012-26, Vancouver School of Economics, revised 29 Oct 2012.
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    Cited by:
    1. Elish Kelly & Seamus McGuinness & Philip O’Connell & David Haugh & Alberto González Pandiella, 2013. "Transitions in and out of Unemployment among Young People in the Irish Recession," OECD Economics Department Working Papers, OECD Publishing 1084, OECD Publishing.
    2. Murray, James, 2014. "Fiscal Policy Uncertainty and Its Macroeconomic Consequences," MPRA Paper 57409, University Library of Munich, Germany.
    3. Julien Albertini & Arthur Poirier, 2014. "Unemployment benefits extensions at the zero lower bound on nominal interest rate," SFB 649 Discussion Papers SFB649DP2014-019, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    4. Joanne W. Hsu & David A. Matsa & Brian T. Melzer, 2014. "Positive Externalities of Social Insurance: Unemployment Insurance and Consumer Credit," NBER Working Papers 20353, National Bureau of Economic Research, Inc.
    5. Johannes F. Schmieder & Till M. von Wachter & Stefan Bender, 2013. "The Causal Effect of Unemployment Duration on Wages: Evidence from Unemployment Insurance Extensions," NBER Working Papers 19772, National Bureau of Economic Research, Inc.
    6. Kory Kroft & Fabian Lange & Matthew J. Notowidigdo & Lawrence F. Katz, 2014. "Long-Term Unemployment and the Great Recession: The Role of Composition, Duration Dependence, and Non-Participation," NBER Working Papers 20273, National Bureau of Economic Research, Inc.
    7. Michelle L. Barnes & Fabià Gumbau-Brisa & Giovanni P. Olivei, 2013. "Cyclical versus secular: decomposing the recent decline in U.S. labor force participation," Public Policy Brief, Federal Reserve Bank of Boston, Federal Reserve Bank of Boston.

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