Labor Market Implications of Unemployment Benefit Extensions

Abstract:

We measure the effect of unemployment benefit duration on employment. We exploit the variation induced by the decision of Congress in December 2013 not to reauthorize the unprecedented benefit extensions introduced during the Great Recession. Federal benefit extensions that ranged from 0 to 47 weeks across U.S. states at the beginning of December 2013 were abruptly cut to zero. To achieve identification we use the fact that this policy change was exogenous to cross-sectional differences across U.S. states and we exploit a policy discontinuity at state borders. Next, we show that countercyclical unemployment benefit extensions can lead to jobless recoveries. We augment the standard Mortensen-Pissarides model to incorporate unemployment benefit expiration and state-dependent extensions of unemployment benefits. We 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.