Unemployment Insurance and Macroeconomic Stabilization

"Unemployment Insurance and Macroeconomic Stabilization." In Recession Ready, ed. Heather Boushey, Ryan Nunn, and Jay Shambaugh

37 Pages Posted: 11 Sep 2019

See all articles by Gabriel Chodorow-Reich

Gabriel Chodorow-Reich

Harvard University Department of Economics

John M. Coglianese

Harvard University

Date Written: May 1, 2019

Abstract

Unemployment insurance (UI) provides an important cushion for workers who lose their jobs. In addition, UI may act as a macroeconomic stabilizer during recessions. This chapter examines this UI’s macroeconomic stabilization role, considering both the regular UI program which provides benefits to short-term unemployed workers as well as automatic and emergency extensions of benefits that cover long-term unemployed workers. We make a number of analytic points concerning the macroeconomic stabilization role of UI. First, recipiency rates in the regular UI program are quite low. Second, the automatic component of benefit extensions, Extended Benefits (EB), has played almost no role historically in providing timely, countercyclical stimulus while emergency programs are subject to implementation lags. Additionally, except during an exceptionally high and sustained period of unemployment, large UI extensions have limited scope to act as macroeconomic stabilizers even if they were made automatic because relatively few individuals reach long-term unemployment. Finally, the output effects from increasing the benefit amount for short-term unemployed are constrained by estimated consumption responses of below 1. We propose five changes to the UI system that would increase UI benefits during recessions and improve the macroeconomic stabilization role: (I) Expand eligibility and encourage take-up of regular UI benefits. (II) Make EB fully federally financed. (III) Remove look-back provisions from EB triggers that make automatic extensions turn off during periods of prolonged unemployment. (IV) Add additional automatic extensions to increase benefits during periods of extremely high unemployment. (V) Add an automatic federally financed increase in the weekly UI benefit amount during recessions. We caution that these reforms may not by themselves have a large macroeconomic impact. Still, they would help to better align the UI system with its microeconomic objective. and, together Together with other policy reforms to automatic stabilizers, these proposed changes to the UI system would could help to mitigate future recessions.

Suggested Citation

Chodorow-Reich, Gabriel and Coglianese, John M., Unemployment Insurance and Macroeconomic Stabilization (May 1, 2019). "Unemployment Insurance and Macroeconomic Stabilization." In Recession Ready, ed. Heather Boushey, Ryan Nunn, and Jay Shambaugh. Available at SSRN: https://ssrn.com/abstract=3447241

Gabriel Chodorow-Reich (Contact Author)

Harvard University Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
6174963226 (Phone)
6174963226 (Fax)

HOME PAGE: http://scholar.harvard.edu/chodorow-reich

John M. Coglianese

Harvard University ( email )

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