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Do Extended Unemployment Bene ts Lengthen Unemployment Spells? Evidence from Recent Cycles in the U.S. Labor Market

  • Henry S. Farber

    (Princeton University, NBER, IZA)

  • Robert G. Valletta

    (Federal Reserve Bank of San Francisco, IZA)

In response to the Great Recession and sustained labor market downturn, the availability of unemployment insurance (UI) benefits was extended to new historical highs in the United States, up to 99 weeks as of late 2009 into 2012. We exploit variation in the timing and size of UI bene t extensions across states to estimate the overall impact of these extensions on unemployment duration, comparing the experience with the prior extension of bene ts (up to 72 weeks) during the much milder downturn in the early 2000s. Using monthly matched individual data from the U.S. Current Population Survey (CPS) for the periods 2000-2005 and 2007-2012, we estimate the e ects of UI extensions on unemployment transitions and duration. We rely on individual variation in bene t availability based on the duration of unemployment spells and the length of UI bene ts available in the state and month, conditional on state economic conditions and individual characteristics. We nd a small but statistically signi cant reduction in the unemployment exit rate and a small increase in the expected duration of unemployment arising from both sets of UI extensions. The e ect on exits and duration is primarily due to a reduction in exits from the labor force rather than a decrease in exits to employment (the job nding rate). The magnitude of the overall e ect on exits and duration is similar across the two episodes of bene t extensions. Although the overall e ect of UI extensions on exits from unemployment is small, it implies a substantial e ect of extended bene ts on the steady-state share of unemployment in the cross-section that is long-term.

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File URL: http://arks.princeton.edu/ark:/88435/dsp01th83kz40p
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Paper provided by Princeton University, Department of Economics, Industrial Relations Section. in its series Working Papers with number 1450.

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Date of creation: Apr 2013
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Handle: RePEc:pri:indrel:dsp01th83kz40p
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  1. Poterba, James M & Summers, Lawrence H, 1986. "Reporting Errors and Labor Market Dynamics," Econometrica, Econometric Society, vol. 54(6), pages 1319-38, November.
  2. Jesse Rothstein, 2011. "Unemployment Insurance and Job Search in the Great Recession," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 43(2 (Fall)), pages 143-213.
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  9. Kory Kroft & Matthew J. Notowidigdo, 2011. "Should Unemployment Insurance Vary With the Unemployment Rate? Theory and Evidence," NBER Working Papers 17173, National Bureau of Economic Research, Inc.
  10. Poterba, James M & Summers, Lawrence H, 1995. "Unemployment Benefits and Labor Market Transitions: A Multinomial Logit Model with Errors in Classification," The Review of Economics and Statistics, MIT Press, vol. 77(2), pages 207-16, May.
  11. Shigeru Fujita, 2010. "Economic effects of the unemployment insurance benefit," Business Review, Federal Reserve Bank of Philadelphia, issue Q4, pages 20-27.
  12. 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.
  13. Chetty, Raj, 2008. "Moral Hazard versus Liquidity and Optimal Unemployment Insurance," Scholarly Articles 9751256, Harvard University Department of Economics.
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