Wednesday, May 29, 2013

Unemployment benefits extensions and unemployment spells

During the last recession in the US, the maximum duration of unemployment insurance benefits has been extended several times. The justification has been that as the unemployment rate is higher, it is more difficult for the unemployed to find jobs, and they should not be blamed for not finding one in due time. Of course, this raises the specter of moral hazard, as they may not be enticed to search for a job as avidly as before. The question is then, how much has the unemployment rate increased due to this extension and the associated moral hazard? I reported previously on a nice paper that used extensive theory and calibration to come to the conclusion that about a quarter of the increase in the unemployment rate can be attributed to this. By now, though, we have good data that should allow an empirical analysis.

Henry Farber and Robert Valletta provide the first serious estimations I have seen. They exploit cross-state variations in the extensions to identify their impact on job market transitions. They find little effect from the extensions on re-employment probabilities. Rather, they have prevented people from exiting the labor force, which is surprising given the severe decline in the labor force even after the recession was declared over. This means that the impact on unemployment duration is rather modest on average, but larger for the long-term unemployed. In the end, only a tenth of the increase in the unemployment rate can be traced to the benefit extension.

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