Unemployment Caused by Increased Unemployment Benefits

November 5, 2013

Unemployment in the United States rose dramatically during the Great Recession and has remained at an unusually high level for a long time. The policy response involved an unprecedented extension of unemployment benefits with benefit duration rising from the usual 26 weeks to as long as 99 weeks, says a recent study by researchers with the National Bureau of Economic Research.

The researchers exploit this policy discontinuity at U.S. state borders to identify the effects of unemployment insurance policies on unemployment.

  • Their estimates imply that most of the persistent increase in unemployment during the Great Recession can be accounted for by the unprecedented extensions of unemployment benefit eligibility.
  • The researchers find that an increase in unemployment due to benefit extensions is similar in magnitude to the decline of employment.
  • Also, border counties with longer benefit durations have much higher unemployment, despite the potential beneficial effects of spending.

The potential offsetting effect of lower employment due to higher benefits was also recognized by policymakers but considered to be quantitatively very small. The researchers find that it is very important quantitatively. The results of a sizeable macro effect leads to the expectation that the stimulative effect of higher spending by the unemployed is largely offset by the dramatic negative effect on employment from the general equilibrium effect of benefit expansion on vacancy creation.

It's interesting to note that similar effects were found due to the increases in benefits during the Great Recession and during the 2001 recession, despite the fact that the latter featured much higher nominal interest rates.

Source: Marcus Hagedorn et al., "Unemployment Benefits and Unemployment in the Great Recession: The Role of Macro Effects," National Bureau of Economic Research, October 2013.

 

Browse more articles on Economic Issues