Unemployment Durations and Extended Unemployment Benefits in Local Labor Markets

Abstract

Extended unemployment benefits programs are triggered by the state insured unemployment rate while intrastate demand conditions often vary dramatically. Some tight local labor markets may therefore exhibit a large effect of extended unemployment benefits. Using a competing risk duration model, this paper measures the size of the entitlement effect across two labor markets facing dramatically different demand conditions. This exercise is important for evaluating potential benefits of proposed sub-state trigger extended benefits programs. The empirical results indicate that, in both recall and new job hazard, the entitlement effect is stronger in low unemployment labor markets. This finding is robust across a number of alternative specifications and econometric approaches. Implementing sub-state trigger extended benefits programs may therefore yield substantial benefits in terms of reducing the adverse incentives of unemployment insurance.

JEL Classification: J65, J64, C41, D89