Unemployment Benefit Extensions Caused Jobless Recoveries!?
University of Pennsylvania - Department of Economics; Amherst College - Department of Economics
April 21, 2014
PIER Working Paper No. 14-013
The last three recessions in the United States were followed by jobless recoveries: while labor productivity recovered, unemployment remained high. In this paper, we show that countercyclical unemployment benefit extensions lead to jobless recoveries. We augment the standard Mortensen-Pissarides model to incorporate unemployment benefits expiration and state-dependent extensions of unemployment benefits. In the model, an extension of unemployment benefits slows down the recovery of vacancy creation in the aftermath of a recession. We calibrate the model to US data and show that it is quantitatively consistent with observed labor market dynamics, in particular the emergence of jobless recoveries after 1990. Furthermore, counterfactual experiments indicate that unemployment benefits are quantitatively important in explaining jobless recoveries.
Number of Pages in PDF File: 33
Keywords: Unemployment Insurance, Business Cycles, Jobless Recoveries
JEL Classification: E24, E32, J65
Date posted: April 25, 2014