Positive Externalities of Social Insurance: Unemployment Insurance and Consumer Credit

61 Pages Posted: 4 Aug 2014

See all articles by Joanne W. Hsu

Joanne W. Hsu

Board of Governors of the Federal Reserve System

David A. Matsa

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER)

Brian Melzer

Federal Reserve Bank of Chicago

Multiple version iconThere are 2 versions of this paper

Date Written: July 2014

Abstract

This paper studies the impact of unemployment insurance (UI) on consumer credit markets. Exploiting heterogeneity in UI generosity across U.S. states and over time, we find that UI helps the unemployed avoid defaulting on their mortgage debt. We estimate that UI expansions during the Great Recession prevented about 1.4 million foreclosures. Lenders respond to this decline in default risk by expanding credit access and reducing interest rates for low-income households at risk of being laid off. Our findings call attention to two benefits of unemployment insurance not previously highlighted: reducing deadweight losses from loan default and expanding access to credit.

Suggested Citation

Hsu, Joanne W. and Matsa, David A. and Melzer, Brian, Positive Externalities of Social Insurance: Unemployment Insurance and Consumer Credit (July 2014). NBER Working Paper No. w20353. Available at SSRN: https://ssrn.com/abstract=2475700

Joanne W. Hsu (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

David A. Matsa

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-8337 (Phone)
847-491-5719 (Fax)

National Bureau of Economic Research (NBER) ( email )

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Brian Melzer

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

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