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Unemployment benefits and work incentives: the US labour market in the Great Recession

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  • David R. Howell
  • Bert M. Azizoglu

Abstract

In the midst of sharply rising long-term unemployment, a series of unemployment benefit (UB) eligibility extensions raised the regular 26-week limit to as many as 99 weeks in some states. In response, leading economists have invoked the 'laws of economics' to warn that the extensions may be responsible for much of the current unemployment crisis. This prediction follows directly from a neoclassical vision in which jobs are taken only to generate the income necessary for desired levels of consumption and leisure, workers can 'price' themselves into a job by lowering wage demands, and benefit eligibility rules are not effectively enforced, so any income replacement must reduce work incentives and increase unemployment. In contrast, in a Keynesian--Institutionalist vision, there is job rationing in economic downturns, worker identities are often closely linked to work, there is recognition of long-run scarring effects of extended unemployment, and UB work rules are enforced, so even generous income replacement is not likely to produce much voluntary unemployment, especially in recessions. This paper reviews the evidence on the effects of the UB extensions of 2008--9. The case for the orthodox prediction has relied heavily on extrapolating from pre-Great Recession findings, particularly through the use of selected 'spike at benefit-exhaustion' results from the early 1980s. We conclude that the more recent spike evidence, the recent shifts in the Beveridge curve, and the labour flows data (unemployment to employment) evidence offer little support for the orthodox disincentive view of the current unemployment crisis in the US. If UB generosity has increased unemployment, it has done so more by keeping workers attached to the labour market than by reducing the incentive to work. Copyright 2011, Oxford University Press.

Suggested Citation

  • David R. Howell & Bert M. Azizoglu, 2011. "Unemployment benefits and work incentives: the US labour market in the Great Recession," Oxford Review of Economic Policy, Oxford University Press, vol. 27(2), pages 221-240.
  • Handle: RePEc:oup:oxford:v:27:y:2011:i:2:p:221-240
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    File URL: http://hdl.handle.net/10.1093/oxrep/grr017
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    References listed on IDEAS

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    1. Nakajima, Makoto, 2012. "A quantitative analysis of unemployment benefit extensions," Journal of Monetary Economics, Elsevier, vol. 59(7), pages 686-702.
    2. Michael W. L. Elsby & Bart Hobijn & Aysegul Sahin, 2010. "The Labor Market in the Great Recession," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 41(1 (Spring), pages 1-69.
    3. Schmieder, Johannes F. & Wachter, Till von & Bender, Stefan, 2010. "The effects of unemployment insurance on labor supply and search outcomes : regression discontinuity estimates from Germany," IAB Discussion Paper 201004, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
    4. Raj Chetty, 2008. "Moral Hazard vs. Liquidity and Optimal Unemployment Insurance," NBER Working Papers 13967, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Lane Kenworthy & Timothy Smeeding, 2013. "GINI Country Report: Growing Inequalities and their Impacts in the United States," GINI Country Reports united_states, AIAS, Amsterdam Institute for Advanced Labour Studies.
    2. Jeffrey P. Thompson & Timothy Smeeding, 2013. "Inequality and poverty in the United States: the aftermath of the Great Recession," Finance and Economics Discussion Series 2013-51, Board of Governors of the Federal Reserve System (U.S.).
    3. Molnar, Agnes & O’Campo, Patricia & Ng, Edwin & Mitchell, Christiane & Muntaner, Carles & Renahy, Emilie & St. John, Alexander & Shankardass, Ketan, 2015. "Protocol: Realist synthesis of the impact of unemployment insurance policies on poverty and health," Evaluation and Program Planning, Elsevier, vol. 48(C), pages 1-9.
    4. Jesse Rothstein, 2011. "Unemployment Insurance and Job Search in the Great Recession," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(2 (Fall)), pages 143-213.
    5. Enache Cosmin, 2013. "Adverse Incentive Effects of the Unemployment Benefit Level in Romania," Scientific Annals of Economics and Business, De Gruyter Open, vol. 60(1), pages 54-66, July.
    6. Hilary Hoynes & Douglas L. Miller & Jessamyn Schaller, 2012. "Who Suffers during Recessions?," Journal of Economic Perspectives, American Economic Association, vol. 26(3), pages 27-48, Summer.
    7. Christine Erhel & Charlotte Levionnois, 2013. "Labour Market Policies in Times of Crisis: A Comparison of the 1992-1993 and 2008-2010 Recessions," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00880933, HAL.
    8. Gerards, Ruud & Welters, Ricardo, 2016. "Impact of financial pressure on unemployed job search, job find success and job quality," ROA Research Memorandum 008, Maastricht University, Research Centre for Education and the Labour Market (ROA).
    9. Jeffrey Thompson & Timothy M. Smeeding, 2011. "Inequality in the Great Recession: The Case of the United States," Working Papers wp271, Political Economy Research Institute, University of Massachusetts at Amherst.
    10. Henry S. Farber & Robert G. Valletta, 2015. "Do Extended Unemployment Benefits Lengthen Unemployment Spells?: Evidence from Recent Cycles in the U.S. Labor Market," Journal of Human Resources, University of Wisconsin Press, vol. 50(4), pages 873-909.
    11. Christine Erhel & Charlotte Levionnois, 2015. "Labour Market Policies in Times of Crisis: A Reaction Function Approach for the Period 1985–2010," LABOUR, CEIS, vol. 29(2), pages 141-162, June.
    12. Altman, Morris, 2014. "Insights from behavioral economics on how labor markets work," Working Paper Series 3466, Victoria University of Wellington, School of Economics and Finance.
    13. Bradbury, Katharine L., 2014. "Labor market transitions and the availability of unemployment insurance," Working Papers 14-2, Federal Reserve Bank of Boston.

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