The Consumption Response to Extended Unemployment Benefits in the Great Recession

Abstract

The Great Recession and the years that followed witnessed a dramatic expansion in the duration of unemployment insurance (UI) benefits available to unemployed workers in the United States. An important motivation for this policy was to stimulate demand by transferring funds to households that would be likely to spend them. This paper uses the variation across states in the UI expansion to estimate the consumption response to extended UI benefits. We estimate that an additional week of UI increased household consumption by a statistically significant 1.68 percent. Consistent with the hypothesis that unemployed households are likely to be particularly liquidity constrained, this point estimate translates into a marginal propensity to consume out of UI benefits in the range of 0.59-0.91, which is larger than existing estimates of the consumption response to income transfers for all households.

Keywords: Consumption, unemployment insurance, fiscal policy

JEL Classification: D12, D91, E21, E62, J65