Unemployment Benefit Extensions and Unemployment during the Great Recession: The Role of Macro Effects

Unemployment Benefit Extensions and Unemployment in the Great Recession: The Role of Macro Effects

(with Marcus Hagedorn, Iourii Manovskii, and Kurt Mitman)

New Draft NBER Working Paper #19499 NY FED Staff Reports #646

• Media Coverage: Wall Street Journal, Bloomberg, Business Insider, The Washington Post, Washington Examiner

• A video showing UI duration across states during the Great Recession

• Our stimulative debate with Bob Hall, upon his extensive comments, led us to write this response.

• A blog post I wrote on Liberty Street Economics: Do Unemployment Benefit Expirations Help Explain the Recent Surge in Job Openings?

• A case study on the experience of North Carolina after cutting UI durations. Data used in the note can be downloaded here.

Abstract:

We exploit a policy discontinuity at U.S. state borders to identify the labor market implications of unemployment benefit extensions. In contrast to the existing literature that focused on estimating the effects of benefit duration on job search decisions by the unemployed—the micro effect—we are guided by equilibrium labor market theory and focus on measuring the general equilibrium macro effect that operates through the response of job creation to benefit extensions. After developing a new methodology to measure the macro effect, we find that it is this effect that is very important quantitatively. In particular, benefit extensions raise equilibrium wages and lead to a sharp contraction in vacancy creation, employment, and a rise in unemployment.

Below is a video showing UI duration across states during the Great Recession: