Unemployment Benefits and Work Incentives: The U.S. Labor Market in the Great Recession (revised)

This working paper has been published in the Oxford Review of Economic Policy, volume 27, no. 2 (summer 2011).Revised May 2011In response to rapidly rising long-term unemployment, unemployment insurance (UI) eligibility extensions were enacted that raised the regular 26-week limit to as many as 99 weeks for some workers. As extended program claimants increased to over 6 million, the ‘laws of economics’ have been invoked to argue that this extended eligibility carries much of the blame for the persistence of the long-term unemployment crisis. Our assessment of this orthodox work disincentive account has three main parts. The first considers what theory suggests: predictions of large work disincentive effects follow from a model that focuses attention on the “value of unemployment” (when benefits replace earned income and workers prefer “leisure” to work); disincentive effects are likely to be much smaller when the focus shifts to the “value of employment” (there are large nonpecuniary benefits to holding a job, and substantial social, psychological and future employment costs to idleness) and to institutional realities of the UI system, which require acceptance of reasonable job offers. The second part reviews the empirical evidence on the timing of the exit of unemployed workers into employment around the time of UI benefit exhaustion, the main evidence used in support of large-scale disincentive effects; we conclude that recent research shows little or no empirical support for such “spikes”. The third part explores current evidence of work disincentive effects; we find no support for such labor supply effects in the 2007-10 data on UI claimants, hires, job openings, and labor flows. If the extensions have raised long-term unemployment, it seems most likely due to maintaining labor market participation, not to work disincentives.