Friday, April 1, 2011

The impact of the extension of unemployment insurance benefits in the US

Given the depth of the last recession and the obvious difficulties unemployed workers have to find new jobs, the US government has successively and temporarily extended the usual 26 week period during which unemployment insurance benefits are given, up to 99 weeks for some workers. On consequence that has been worrying some is that this will leads job seekers to seek less jobs, as there is less urgency to be employed. But pointing to the longer duration of unemployment is not appropriate, as this depends to a (very large?) extent on the general business climate. Just looking at data is not sufficient, you need to put in some structure in the form of a theory.

Makoto Nakajima builds an elaborate model that features job search à la Mortensen-Pissarides with variable search effort, consumption-saving decisions, borrowing constraints, skill depreciation in unemployment and appreciation in employment. This complex model is then calibrated to the average state of the US economy, and set to start in a state as close as possible to the one in 2007. Then the transition paths are computed as the economy is hit by shocks, with and without benefit extensions, assuming economic agents did not expect the extensions. All in all an impressive exercise. The conclusion: about a quarter of the 4.8 point increase in the unemployment rate is due to the longer duration of benefits. This is not insignificant, but it could be an acceptable price to pay for the exceptional circumstances.

3 comments:

Anonymous said...

I'm happy for your find, EL, and I'm gonna let you finish, but Nakajima has some of the best computational notes of all time! Of all time!

Anonymous said...

^^ David? Is that you?

James Reade said...

Now, on the back of your attempted destruction of David Hendry a few weeks back EL, I'm intrigued about how this paper fits into your four-point "economics is a science" scheme. It doesn't estimate the model, and hence doesn't do number four in those bullet points of yours.