Do Unemployment Insurance Benefits Improve Match and Employer Quality? Evidence from Recent U.S. Recessions

Abstract

Unemployment Insurance (UI) benefits have a moral hazard effect and a liquidity effect, with both generating increases in unemployment spells but the latter increasing wages due to the ability to find better matches or better jobs. Previous papers, however, find mixed evidence on the impact of UI on wages. In this paper, we re-examine the effect of UI on wages in the U.S. and present novel evidence using LEHD data to examine the channels through which UI increases earnings, including: (1) the quality of the match, (2) positive sorting of employers and employees, and (3) the quality of the employer. We find that the increased UI generosity in the U.S. increased wages by both increasing the quality of the match as well as the quality of the job obtained after the unemployment spell, though there is less evidence of improved sorting. Consistent with improvements in match and employer quality, we also find that the likelihood of remaining on the job increases with UI generosity. Consistent with a liquidity effect on search, we also find that the effects on the quality of the match are larger for those who are more likely to be liquidity constrained, including women, minorities, and the less-educated.