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Disincentive effects of unemployment insurance benefits

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  • Hornstein, Andreas
  • Karabarbounis, Marios
  • Kurmann, André
  • Lalé, Etienne
  • Ta, Lien

Abstract

Unemployment insurance (UI) acts both as a disincentive for labor supply and as a demand stimulus, which may explain why empirical studies often find limited effects of UI on employment. This paper provides independent estimates of the disincentive effects arising from the largest expansion of UI in U.S. history, the pandemic unemployment benefits. Using high-frequency data on small restaurants and retailers from Homebase, we control for demand effects by comparing neighboring businesses that largely share the positive impact of UI stimulus. We find that employment in low-wage businesses recovered more slowly than employment in neighboring high-wage businesses in labor markets with larger differences in the relative generosity of pandemic UI benefits. According to a labor search model that replicates the estimated employment differences between low- and high-wage businesses, the disincentive effects from the pandemic UI programs held back the aggregate employment recovery by 3.4 percentage points between April and December 2020.

Suggested Citation

  • Hornstein, Andreas & Karabarbounis, Marios & Kurmann, André & Lalé, Etienne & Ta, Lien, 2025. "Disincentive effects of unemployment insurance benefits," CLEF Working Paper Series 86, Canadian Labour Economics Forum (CLEF), University of Waterloo.
    • Handle: RePEc:zbw:clefwp:319878
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    Cited by:

    1. Serdar Birinci & Kurt See, 2024. "The Implications of Labor Market Heterogeneity on Unemployment Insurance Design," Working Papers 2024-026, Federal Reserve Bank of St. Louis, revised 18 Nov 2024.
    2. Serdar Birinci & Yusuf Mercan & Kurt See, 2024. "Mismatch Unemployment During COVID-19 and the Post-Pandemic Labor Shortages," Working Papers 2024-025, Federal Reserve Bank of St. Louis, revised 28 Feb 2025.

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    More about this item

    Keywords

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    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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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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