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A quantitative analysis of unemployment benefit extensions

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  • Makoto Nakajima

Abstract

This paper measures the effect of extensions of unemployment insurance (UI) benefits on the unemployment rate using a calibrated structural model that features job search and consumption-saving decision, skill depreciation, UI eligibility, and UI benefit extensions that capture what has happened during the current downturn. The author finds that the extensions of UI benefits contributed to an increase in the unemployment rate by 1.2 percentage points, which is about a quarter of an observed increase during the current downturn (a 5.1 percentage point increase from 4.8 percent at the end of 2007 to 9.9 percent in the fall of 2009). Among the remaining 3.9 percentage points, 2.4 percentage points are due to the large increase in the separation rate, while the staggering job-finding probability contributes 1.4 percentage points. The last extension in December 2010 moderately slows down the recovery of the unemployment rate. Specifically, the model indicates that the last extension keeps the unemployment rate higher by up to 0.4 percentage point during 2011.

Suggested Citation

  • Makoto Nakajima, 2011. "A quantitative analysis of unemployment benefit extensions," Working Papers 11-8, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:11-8
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    References listed on IDEAS

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    1. Marcus Hagedorn & Iourii Manovskii, 2008. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited," American Economic Review, American Economic Association, vol. 98(4), pages 1692-1706, September.
    2. Moffitt, Robert, 1985. "Unemployment insurance and the distribution of unemployment spells," Journal of Econometrics, Elsevier, vol. 28(1), pages 85-101, April.
    3. Per Krusell & Toshihiko Mukoyama & Ayşegül Şahin, 2010. "Labour-Market Matching with Precautionary Savings and Aggregate Fluctuations," Review of Economic Studies, Oxford University Press, vol. 77(4), pages 1477-1507.
    4. Stephen A. Woodbury, 2009. "Unemployment," Chapters, in: Kenneth G. Dau-Schmidt & Seth D. Harris & Orly Lobel (ed.),Labor and Employment Law and Economics, chapter 17, Edward Elgar Publishing.
    5. Shigeru Fujita, 2010. "Economic effects of the unemployment insurance benefit," Business Review, Federal Reserve Bank of Philadelphia, issue Q4, pages 20-27.
    6. Raj Chetty, 2008. "Moral Hazard vs. Liquidity and Optimal Unemployment Insurance," NBER Working Papers 13967, National Bureau of Economic Research, Inc.
    7. Juan C. Conesa & Dirk Krueger, 1999. "Social Security Reform with Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(4), pages 757-795, October.
    8. Makoto Nakajima, 2012. "Business Cycles In The Equilibrium Model Of Labor Market Search And Self‐Insurance," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(2), pages 399-432, May.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The impact of the extension of unemployment insurance benefits in the US
      by Economic Logician in Economic Logic on 2011-04-01 19:03:00

    Citations

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    Cited by:

    1. Kurt Mitman & Stanislav Rabinovich, 2011. "Pro-Cyclical Unemployment Benefits? Optimal Policy in an Equilibrium Business Cycle Model," PIER Working Paper Archive 11-010, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    2. Krause, Michael U. & Uhlig, Harald, 2012. "Transitions in the German labor market: Structure and crisis," Journal of Monetary Economics, Elsevier, vol. 59(1), pages 64-79.
    3. 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.
    4. Michael W.L. Elsby & Bart Hobijn & Aysegul Sahin & Robert G. Valletta, 2011. "The Labor Market in the Great Recession: An Update," Tinbergen Institute Discussion Papers 11-173/3, Tinbergen Institute.
    5. Guler, Bulent & Taskin, Temel, 2013. "Does unemployment insurance crowd out home production?," European Economic Review, Elsevier, vol. 62(C), pages 1-16.
    6. David R. Howell & Bert M. Azizoglu, 2011. "Unemployment Benefits and Work Incentives: The U.S. Labor Market in the Great Recession (revised)," Working Papers wp257_revised, Political Economy Research Institute, University of Massachusetts at Amherst.

    More about this item

    Keywords

    Unemployment insurance; Unemployment;

    JEL classification:

    • 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
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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