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Unemployment Insurance as an Automatic Stabilizer: The Financial Channel

64 Pages Posted: 8 Mar 2015 Last revised: 22 May 2017

Marco Di Maggio

Harvard Business School; National Bureau of Economic Research (NBER)

Amir Kermani

University of California, Berkeley; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: April 10, 2017

Abstract

We assess the extent to which unemployment insurance (UI) serves as an automatic stabilizer to mitigate the economy's sensitivity to shocks. Using an empirical design based on heterogeneity in local benefit generosity, we estimate that a one standard deviation increase in generosity attenuates the effect of adverse shocks on employment growth by 7% and on earnings growth by 6%. Consistent with the demand channel, we find that consumption is less responsive to local labor demand shocks in counties with more generous benefits. Furthermore, a financial channel is a key underlying driver of the aggregate demand's response to negative shocks. We find that households' delinquencies on their financial obligations are less sensitive to negative employment shocks, whenever UI is more generous, which reduces banks' incentive to tighten credit standards in response to negative shocks. Thus, the financial accelerator is dampened by having a more generous UI. This mechanism also reduces the sensitivity of house prices to negative shocks, in particular, in less elastic regions.

Keywords: Unemployment insurance, automatic stabilizers, Bartik shocks, volatility, aggregate demand

Suggested Citation

Di Maggio, Marco and Kermani, Amir, Unemployment Insurance as an Automatic Stabilizer: The Financial Channel (April 10, 2017). Harvard Business School Finance Working Paper Forthcoming. Available at SSRN: https://ssrn.com/abstract=2575434 or http://dx.doi.org/10.2139/ssrn.2575434

Marco Di Maggio (Contact Author)

Harvard Business School ( email )

Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Amir Kermani

University of California, Berkeley ( email )

2220 Piedmont Ave
Berkeley, CA 94720
United States

HOME PAGE: http://faculty.haas.berkeley.edu/amir/research/research.html

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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