This paper investigates the impact of endogenous unemployment insurance (UI) extensions on the dynamics of unemployment and its duration distribution in the US. Using a stochastic random-search-and-matching model with worker heterogeneity, I allow for the maximum UI duration to endogenously depend on unemployment, and for UI benefits to depend on worker characteristics replicating the US benefit system. UI extensions have a moderate effect on total unemployment via both job search and job separations, and a larger effect on long-term unemployment via job search responses. Worker heterogeneity is important for the unemployment duration dynamics via heterogeneous job-finding rates. Disregarding the rational expectations about UI extensions overestimates unemployment by 2 percentage points.
This paper quantifies the effects of the increasing maximum unemployment insurance (UI) duration during recessions on the drop in the correlation between output and labour productivity in the U.S. since the early 1980’s - the so-called productivity puzzle. Using a general equilibrium search and matching model with stochastic UI duration, heterogeneous match quality, variable search intensity and on-the-job search, I demonstrate that the model can explain over 40 percent of the drop in this correlation (28 percent when the Great Moderation is taken into account). More generous UI extensions during recent recessions cause workers to be more selective with job offers and lower job search effort. The former channel raises the overall productivity in bad times. The latter prolongs UI extensions since in the U.S. they are triggered by high unemployment.
Standard search theory predicts that (1) job search intensity increases with the relative gain from searching, and (2) job search intensity increases the job finding probability. Firstly, this paper presents new empirical findings that are at odds with these predictions when workers are categorised by their unemployment insurance (UI) history. UI recipients and former recipients search harder than those who never take up UI, yet they exhibit lower job-finding probabilities. Subsequently, I incorporate unproductive and inefficient job search, consistent with these empirical findings, into an otherwise standard stochastic equilibrium search-and-matching model with endogenous search intensity. Three key results emerge from these job search imperfections: (1) Aggregate search intensity becomes acyclical leading to underestimated matching efficiency; (2) the general equilibrium effects of UI extensions and the labour market fluctuations are dampened; and (3) unemployment and its duration become more persistent.
This paper studies the effects of shocks to the flow hazards into and out of unemployment on the aggregate household saving rate, and attempts to explain the spike in the US saving rate during the Great Recession with these shocks. The results are obtained from a Dynamic Stochastic General Equilibrium model under incomplete markets and borrowing constraints similar to Krusell and Smith (1998) using extended path algorithm, perturbation method and approximate aggregation. It is found that a negative job-finding shock and a positive job-separation shock simultaneously and separately contribute to an increase in the saving rate. Shocks to the job-finding probability create a more drastic and persistent impact on the saving rate than do shocks to the job-separation probability. The baseline model generates the saving rate that exhibits strikingly similar dynamics to the US saving rate; however, the magnitude of the model-generated responses is somewhat smaller than what can be observed in the US. Job-finding shocks alone explain almost all the dynamics of the saving rate during the Great Recession whilst both job-finding and job-separation shocks are important in explaining the saving dynamics during normal times. The same analysis under the complete market assumption yields results completely opposite to the US data.
Historically, unemployment peaks in the first and third quarters—the arrival of cold winters and hot summers. This paper attributes non-seasonally-adjusted (NSA) unemployment fluctuations to temperature shocks and assesses the impact of climate change on unemployment seasonality. Combining granular daily weather across US counties with monthly unemployment rates over the period 1990-2019, we find that extreme temperature days fuel unemployment by freezing hiring and triggering layoffs and thus, insurance claims and recipients. Climate change accounts for 40% of the decline in unemployment seasonality and 13% of the moderation in fluctuations in the overall NSA unemployment rate. Accelerated future warming will propagate the unemployment seasonality through milder winters and harsher summers.
This paper studies the welfare costs of business cycles in an economy with incomplete markets and heterogeneous labour skills across male and female workers. The primary objectives are to quantify the welfare gains or losses that economic agents would experience in the absence of aggregate uncertainty and to analyse how these effects vary across different subgroups. To achieve this, I calibrate a stochastic general equilibrium model incorporating aggregate productivity shocks, individual skill uncertainty, and unemployment risks, and compare the results to a counterpart model without aggregate fluctuations. The findings suggest that eliminating business cycles could increase overall welfare by nearly 6 percent, a figure approximately 700 times larger than Lucas (1987)'s famous estimate. However, a disaggregated analysis challenges the conventional expectation that lower-income groups benefit more from stabilisation due to their heightened exposure to adverse labour market conditions and liquidity constraints. Instead, females gain less than males, low-skilled workers benefit less than high-skilled workers, and unemployed workers see only slightly lower gains than their employed counterparts. While business cycles do not significantly alter overall wealth inequality, they do induce a noticeable shift in the wealth distribution.
We develop an equilibrium search model with endogenous labour force participation and countercyclical unemployment insurance (UI) extensions. Workers optimally search for jobs and their search intensity increases with the return from searching. Despite negative aggregate shocks, countercyclical UI extensions provide incentive to search on the extensive margin during recessions. We use the model to explain the cyclical properties of the transition rate from employment to out-of-labour-force (E2O). As in the US data, the model predicts that E2O is procyclical. This property is in stark contrast to the prediction of the standard search theory (without countercyclical UI extensions) that the labour force participation should increase in booms. We also find that the role of reverse added worker effect on the E2O transitions is relatively limited.