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The Longterm Effects of UI Extensions on Employment

Listed author(s):
  • 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))

The effect of extending the duration of unemployment insurance (UI) benefits on nonem- ployment duration is a hotly debated question. The vast majority of the literature (e.g., Katz and Meyer 1990, Schmieder, von Wachter, and Bender 2012) [henceforth SVB]) analyzes the e ect of extensions in UI durations or increases in UI benefits on the initial nonemployment spell. This may lead to an understatement of the cost of UI extensions, if such extensions increase the incidence of nonemployment beyond the initial spell, as would be predicted by models of stigma, skill depreciation, or supply-side hysteresis (e.g., Blanchard and Diamond 1994, Lemieux and MacLeod 2000). On the other hand, these estimates may overstate em- ployment e ects if longer initial spells tend to reduce future incidence of nonemployment. This might arise because of an increase in individual labor supply, for example due to lower income. In addition, with a nite lifetime (or a nite follow-up period) the nonemployment e ect can also decline mechanically. This can arise since at a given, say, monthly probability of being unemployed, individuals with longer initial spells accumulate less time in nonem- ployment due to a shorter remaining lifetime. Despite these alternative hypotheses, little is known about the longer-term effect of UI extensions on employment. In this paper, we make two contributions. First, we use a regression discontinuity de- sign to analyze the long-term effects of extensions in UI durations. These estimates differ from standard estimates that they incorporate di erences in UI bene t receipt and employ- ment due to recurrent unemployment spells. Second, we extend the welfare formula of UI extensions from SVB to incorporate recurrent nonemployment spells.

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Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2011-064.

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Length: 8 pages
Date of creation: Jan 2011
Handle: RePEc:bos:wpaper:wp2011-064
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References listed on IDEAS
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  1. Raj Chetty, 2008. "Moral Hazard versus Liquidity and Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 173-234, April.
  2. Olivier Jean Blanchard & Peter Diamond, 1994. "Ranking, Unemployment Duration, and Wages," Review of Economic Studies, Oxford University Press, vol. 61(3), pages 417-434.
  3. Lemieux, Thomas & MacLeod, W. Bentley, 2000. "Supply side hysteresis: the case of the Canadian unemployment insurance system," Journal of Public Economics, Elsevier, vol. 78(1-2), pages 139-170, October.
  4. Raj Chetty, 2008. "Moral Hazard versus Liquidity and Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 173-234, April.
  5. Johannes F. Schmieder† & Till von Wachter & Stefan Bender, 2011. "The Effects Of Extended Unemployment Insurance Over The Business Cycle: Evidence From Regression Discontinuity Estimates Over Twenty Years," Boston University - Department of Economics - Working Papers Series WP2011-063, Boston University - Department of Economics.
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