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The Effects of Extended Unemployment Insurance over the Business Cycle: Evidence from Regression Discontinuity Estimates Over Twenty Years

  • Johannes F. Schmieder
  • Till M. von Wachter
  • Stefan Bender

One goal of extending the duration of unemployment insurance (UI) in recessions is to increase UI coverage in the face of longer unemployment spells. Although it is a common concern that such extensions may themselves raise nonemployment durations, it is not known how recessions would affect the magnitude of this moral hazard. To obtain causal estimates of the differential effects of UI in booms and recessions, this paper exploits the fact that, in Germany, potential UI benefit duration is a function of exact age which is itself invariant over the business cycle. We implement a regression discontinuity design separately for twenty years and correlate our estimates with measures of the business cycle. We find that the nonemployment effects of a month of additional UI benefits are, at best, somewhat declining in recessions. Yet, the UI exhaustion rate, and therefore the additional coverage provided by UI extensions, rises substantially during a downturn. The ratio of these two effects represents the nonemployment response of workers weighted by the probability of being affected by UI extensions. Hence, our results imply that the effective moral hazard effect of UI extensions is significantly lower in recessions than in booms. Using a model of job search with liquidity constraints, we also find that, in the absence of market-wide effects, the net social benefits from UI extensions can be expressed either directly in terms of the exhaustion rate and the nonemployment effect of UI durations, or as a declining function of our measure of effective moral hazard.

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File URL: http://www.nber.org/papers/w17813.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17813.

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Date of creation: Feb 2012
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Publication status: published as in Quarterly Journal of Economics. Volume 127, Issue 2, May 2012
Handle: RePEc:nbr:nberwo:17813
Note: EFG LS PE
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  1. Raj Chetty, 2008. "Erratum: Moral Hazard versus Liquidity and Optimal Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 116(6), pages 1197-1197, December.
  2. Caliendo, Marco & Tatsiramos, Konstantinos & Uhlendorff, Arne, 2009. "Benefit Duration, Unemployment Duration and Job Match Quality: A Regression-Discontinuity Approach," IZA Discussion Papers 4670, Institute for the Study of Labor (IZA).
  3. McCrary, Justin, 2008. "Manipulation of the running variable in the regression discontinuity design: A density test," Journal of Econometrics, Elsevier, vol. 142(2), pages 698-714, February.
  4. Michael T. Kiley, 2003. "How should unemployment benefits respond to the business cycle?," Finance and Economics Discussion Series 2003-01, Board of Governors of the Federal Reserve System (U.S.).
  5. Lalive, Rafael, 2006. "How Do Extended Benefits Affect Unemployment Duration? A Regression Discontinuity Approach," IZA Discussion Papers 2200, Institute for the Study of Labor (IZA).
  6. Arntz, Melanie & Lo, Simon M. S. & Wilke, Ralf A., 2007. "Bounds analysis of competing risks : a nonparametric evaluation of the effect of unemployment benefits on migration in Germany," FDZ Methodenreport 200704_en, Institut für Arbeitsmarkt- und Berufsforschung (IAB), Nürnberg [Institute for Employment Research, Nuremberg, Germany].
  7. Martin Browning & Thomas Crossley, 1996. "Unemployment Insurance Benefit Levels and Consumption Changes," Department of Economics Working Papers 1996-01, McMaster University.
  8. David Card & Raj Chetty & Andrea Weber, 2007. "Cash-On-Hand and Competing Models of Intertemporal Behavior: New Evidence from the Labor Market," The Quarterly Journal of Economics, MIT Press, vol. 122(4), pages 1511-1560, November.
  9. Till von Wachter & Jae Song & Joyce Manchester, 2008. "Long-Term Earnings Losses due to Job Separation During the 1982 Recession: An Analysis Using Longitudinal Administrative Data from 1974 to 2004," Discussion Papers 0708-16, Columbia University, Department of Economics.
  10. Jesse Rothstein, 2011. "Unemployment Insurance and Job Search in the Great Recession," NBER Working Papers 17534, National Bureau of Economic Research, Inc.
  11. Pavoni, Nicola, 2007. "On optimal unemployment compensation," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1612-1630, September.
  12. Sanchez, Juan M., 2006. "Optimal State-Contingent Unemployment Insurance," MPRA Paper 2535, University Library of Munich, Germany.
  13. Wilke, Ralf A., 2004. "New Estimates of the Duration and Risk of Unemployment for West-Germany," ZEW Discussion Papers 04-26, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  14. Chetty, Raj, 2008. "Moral Hazard versus Liquidity and Optimal Unemployment Insurance," Scholarly Articles 9751256, Harvard University Department of Economics.
  15. Moffitt, Robert, 1985. "Unemployment insurance and the distribution of unemployment spells," Journal of Econometrics, Elsevier, vol. 28(1), pages 85-101, April.
  16. Camille Landais & Pascal Michaillat & Emmanuel Saez, 2010. "A Macroeconomic Theory of Optimal Unemployment Insurance," NBER Working Papers 16526, National Bureau of Economic Research, Inc.
  17. Lee, David S. & Card, David, 2008. "Regression discontinuity inference with specification error," Journal of Econometrics, Elsevier, vol. 142(2), pages 655-674, February.
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