A Quantitative Analysis of Unemployment Benefit Extensions

Abstract

This paper measures the effect of the ongoing extensions of unemployment insurance (UI) benefits on the unemployment rate using a calibrated structural model that features job search and consumption-saving decisions, skill depreciation, UI eligibility, and UI benefit extensions that capture what has happened in response to the recent downturn. I find that the extensions of UI benefits contributed to an increase in the unemployment rate by 1.4 percentage points, which is about 30 percent of an observed increase between the periods 2005-2007 and 2009-2011 (4.8 percent). Among the remaining 3.4 percentage points, 2.5 percentage points are due to the large increase in the separation rate, while the reduced job-finding rate due to lower productivity contributes 0.9 percentage point. Moreover, the contribution of the UI benefit extensions to the elevated unemployment rate increased from 2009 to 2011; while the number of vacancies has been recovering, the unemployment rate has remained elevated because of the successive extensions. The last extension in December 2010 has moderately slowed down the recovery of the unemployment rate. Specifically, the model indicates that the last extension keeps the unemployment rate higher by 0.6 percentage point during 2011.

Keywords: Unemployment Insurance, Extended Benefits, Labor Market, Search, Consumption, Smoothing

JEL Classification: J64, J65, E24, D91