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Unemployment benefits and unemployment in the Great Recession: the role of macro effects

Author

Listed:
  • Hagedorn, Marcus

    () (University of Oslo)

  • Karahan, Fatih

    (Federal Reserve Bank of New York)

  • Manovskii, Iourii

    () (University of Pennsylvania)

  • Mitman, Kurt

    () (Institute for International Economic Studies, Stockholm University)

Abstract

We exploit a policy discontinuity at U.S. state borders to identify the labor market implications of unemployment benefit extensions. In contrast to the existing literature that focused on estimating the effects of benefit duration on job search decisions by the unemployed—the micro effect—we are guided by equilibrium labor market theory and focus on measuring the general equilibrium macro effect that operates through the response of job creation to benefit extensions. After developing a new methodology to measure the macro effect, we find that it is this effect that is very important quantitatively. In particular, benefit extensions raise equilibrium wages and lead to a sharp contraction in vacancy creation, lower employment, and a rise in unemployment.

Suggested Citation

  • Hagedorn, Marcus & Karahan, Fatih & Manovskii, Iourii & Mitman, Kurt, 2013. "Unemployment benefits and unemployment in the Great Recession: the role of macro effects," Staff Reports 646, Federal Reserve Bank of New York, revised 01 Feb 2015.
  • Handle: RePEc:fip:fednsr:646
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    References listed on IDEAS

    as
    1. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, March.
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    5. Casey B. Mulligan, 2008. "A Depressing Scenario: Mortgage Debt Becomes Unemployment Insurance," NBER Working Papers 14514, National Bureau of Economic Research, Inc.
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    More about this item

    Keywords

    unemployment insurance; unemployment; employment; vacancies; wages; search; matching;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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