Unemployment Benefits and Unemployment in the Great Recession: The Role of Equilibrium Effects

91 Pages Posted: 16 Oct 2013 Last revised: 1 Oct 2019

See all articles by Marcus Hagedorn

Marcus Hagedorn

University of Oslo - Department of Economics

Fatih Karahan

Federal Reserve Bank of New York

Iourii Manovskii

University of Pennsylvania - Department of Economics; IZA Institute of Labor Economics

Kurt Mitman

IIES

Multiple version iconThere are 2 versions of this paper

Date Written: October 1, 2013

Abstract

Equilibrium labor market theory suggests that unemployment benefit extensions affect unemployment by impacting both job search decisions by the unemployed and job creation decisions by employers. The existing empirical literature focused on the former effect only. We develop a new methodology necessary to incorporate the measurement of the latter effect. Implementing this methodology in the data, we find that benefit extensions raise equilibrium wages and lead to a sharp contraction in vacancy creation and employment and a rise in unemployment.

Keywords: unemployment insurance, unemployment, employment, vacancies, wages, search, matching

JEL Classification: E24, J63, J64, J65

Suggested Citation

Hagedorn, Marcus and Karahan, Fatih and Manovskii, Iourii and Mitman, Kurt, Unemployment Benefits and Unemployment in the Great Recession: The Role of Equilibrium Effects (October 1, 2013). FRB of New York Staff Report No. 646. Available at SSRN: https://ssrn.com/abstract=2340678 or http://dx.doi.org/10.2139/ssrn.2340678

Marcus Hagedorn

University of Oslo - Department of Economics ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
Norway

Fatih Karahan (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Iourii Manovskii

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-6880 (Phone)
215-573-2057 (Fax)

HOME PAGE: http://www.econ.upenn.edu/~manovski/

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Kurt Mitman

IIES ( email )

Stockholm, SE-10691
Sweden

HOME PAGE: http://kurtmitman.com

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