Unemployment benefits and work incentives: the US labour market in the Great Recession
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.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Nakajima, Makoto, 2012.
"A quantitative analysis of unemployment benefit extensions,"
Journal of Monetary Economics,
Elsevier, vol. 59(7), pages 686-702.
- Makoto Nakajima, 2011. "A Quantitative Analysis of Unemployment Benefit Extensions," Global COE Hi-Stat Discussion Paper Series gd10-175, Institute of Economic Research, Hitotsubashi University.
- Makoto Nakajima, 2011. "Quantitative Analysis of Unemployment Benefit Extensions," 2011 Meeting Papers 328, Society for Economic Dynamics.
- Makoto Nakajima, 2011. "A quantitative analysis of unemployment benefit extensions," Working Papers 11-8, Federal Reserve Bank of Philadelphia.
- 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.
- Bart Hobijn & Aysegul Sahin & Michael Elsby, 2010. "The Labor Market in the Great Recession," 2010 Meeting Papers 323, Society for Economic Dynamics.
- Michael Elsby & Bart Hobijn & Aysegül Sahin, 2010. "The labor market in the Great Recession," Working Paper Series 2010-07, Federal Reserve Bank of San Francisco.
- Michael W. Elsby & Bart Hobijn & Aysegul Sahin, 2010. "The Labor Market in the Great Recession," NBER Working Papers 15979, National Bureau of Economic Research, Inc.
- 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].
- Raj Chetty, 2008. "Moral Hazard vs. Liquidity and Optimal Unemployment Insurance," NBER Working Papers 13967, National Bureau of Economic Research, Inc. Full references (including those not matched with items on IDEAS)