With the economy weakening, many Members of Congress support a
second economic stimulus package, including extending the time
period over which workers can collect unemployment insurance
(UI). Congress has already extended that time period from 26 to 39
weeks. New legislation, the Unemployment Compensation Extension Act
(H.R. 6867), would extend it to 46 weeks.
The theory is that unemployed workers will spend virtually all
their additional income immediately, providing rapid economic
stimulus. A 2004 study conducted by economist Mark Zandi
concluded that additional UI spending provides
significant economic stimulus, with each dollar in additional
UI spending increasing gross domestic product (GDP) by $1.73. Two
false assumptions, however, marred this study. 1) The study assumed
that every dollar of UI spending funds new consumption when
research shows this does not happen. 2) It also assumed that
unemployment insurance does not change workers' behavior.
Studies consistently show that workers with extended UI
benefits remain unemployed longer. A 13-week extension of
unemployment benefits results in the average worker remaining
unemployed for an additional two weeks.
The Heritage Foundation's Center for Data Analysis used the
forecasting company IHS Global Insight's U.S. Macroeconomic model
to estimate the full macroeconomic effects of extending
unemployment insurance benefits. After taking the
labor-market effects into account, extended UI benefits
provide little economic stimulus. The 13-week extension already
passed by Congress is estimated to have increased annual GDP by an
average of $0.25 for each $1 spent while extended benefits are in
effect. Increasing the duration by an additional 7 weeks to 20
weeks would depress the economy, causing GDP to decrease by $1.7
billion. Unemployment insurance provides virtually no "bang
for the buck" as economic stimulus. This research confirms the
existing scholarly analysis that finds greater unemployment
benefits provide little stimulus. Paying workers not to work
does not promote economic growth. Congress should decide whether to
extend UI benefits based on the merits of the policy, but
should not expect additional UI benefits to promote economic
The Weakening economy
The economy has weakened considerably over the last year.
Congress passed a $168 billion tax rebate in February to stimulate
the economy and stave off a recession. The economy has continued to
deteriorate and appears likely to enter a recession. Congress is
now considering a second stimulus bill.
stimulus bills rarely succeed in revitalizing economic
activity. stimulus checks mailed to American taxpayers, like those
issued in the 1970s and 2001, did not succeed in revitalizing the
economy. During the current period of slow economic growth,
Congress should do what it does best: Set broad economic policy.
Specifically, Congress should concentrate on signaling to
investors and workers alike that its principal focus will be on
improving pro-growth economic policies, mainly in the areas of tax,
energy, and spending. Congress should only pass policies that are
likely to raise the economy to a sustained, higher level of
Unemployment Insurance Promoted as
Many Members of Congress believe that the new stimulus bill
should include expanded unemployment insurance benefits.
Typically, workers who lose their job through no fault of their own
collect unemployment insurance for up to 26 weeks (6 months)
after losing their job, and workers in states with especially high
levels of unemployment can collect payments for an additional 13
weeks. Congress extended the base period to 39 weeks earlier this
year. Legislation that is now before Congress, which may be
included in the next stimulus bill, would allow unemployed workers
to collect UI benefits for an additional seven weeks, for a total
of 46 weeks.
The theory behind extending UI benefits as a stimulus assumes
that unemployed workers will immediately spend any additional UI
payments, instantly increasing consumption, boosting aggregate
demand, and stimulating the economy.
This is not a new idea. Economists in the 1960s thought that
unemployment insurance could function as an important
automatic economic stabilizer. Empirical research in the
1970s demonstrated that this was not the case, and studies since
then have concluded that unemployment insurance plays at best a
small role in stabilizing the economy. Empirical research at
the state level also finds that UI plays a negligible role in
stimulating the economy.
Two recent studies have resurrected the idea of using UI
insurance as economic stimulus. The Congressional Budget Office
(CBO) reviewed various stimulus measures and concluded that UI
payments were one of the most effective means of stimulating
the economy. In 2004, Mark Zandi released a
macroeconomic study of fiscal policies that concluded that
unemployment insurance benefits provided the greatest "bang
for the buck." He found that each $1 spent on additional UI
benefits resulted in $1.73 of economic growth in the short
These findings motivated Congress to pass the recent extension of
UI benefits and have been a driving force behind extending benefits
to 46 weeks.
The CBO and Zandi studies rest on two strong simplifying
assumptions. They assume that unemployed workers spend every
dollar of additional UI benefits almost immediately and that
extending unemployment insurance does not affect workers' behavior.
In that case, every dollar spent on unemployment insurance
adds a dollar to consumption without any direct effects on the
labor market. Both assumptions are false.
Unemployment Insurance Prolongs Unemployment. One of the
most thoroughly established results in labor economics is the
effect of unemployment benefits on unemployed workers'
behavior. labor economists agree that extended unemployment
benefits cause workers to remain unemployed longer than they
This occurs for obvious reasons: Workers respond to incentives.
Unemployment benefits reduce the incentive and the pressure to find
a new job by making it less costly to remain without work.
Consequently workers with UI benefits look for new jobs less
rigorously than do workers without them. The typical unemployed
worker spends about 32 minutes a day looking for a new job.
Workers eligible for UI benefits spend only 20 minutes a day
looking for work during their 15th week of unemployment. They look
much harder when their benefits are about to end, spending more
than 70 minutes a day job hunting in the 26th week of
Since workers with unemployment benefits search less rigorously
for work until their benefits are about to expire, it takes them
longer to find new jobs. labor economists estimate that extending
the potential duration of unemployment benefits by 13 weeks
increases the average amount of time workers on UI remain
unemployed by two weeks. Prolonged unemployment increases the
This has economic consequences. Workers do not create economic
wealth during the additional weeks they remain unemployed. They
save and consume less because UI insurance replaces only a portion
of their wages. labor markets become less flexible because it takes
more time for workers to transition from one industry or state to
another. This hinders economic growth.
Not Every Extra Dollar Is Consumed
The studies that estimate a large stimulus effect from expanded
unemployment benefits also assume that households consume every
dollar of extended benefits they receive. This is a reasonable
assumption. Many UI recipients have limited liquid assets and
a limited ability to borrow, so their spending is determined by
their immediate cash income. Microeconomic research,
however, demonstrates that unemployed households do not follow this
pattern. In fact, each dollar in additional UI benefits
increases household consumption by only $0.55.
Household behavior responds to unemployment benefits. The
spouses of unemployed workers with UI benefits work less than those
without benefits. For married men, each dollar of benefits reduces
their wives' earnings by between 36 and 73 cents. The fall in
spousal income partly offsets the increase in UI benefits. Workers
spend more of their savings without UI, so UI benefits indirectly
fund some additional saving, not consumption.
For a large number of families, extended UI benefits do
less to increase consumption than to provide alternative
financing for consumption that would nonetheless take place.
Macroeconomic models should account for this. Inaccurately assuming
that households consume every additional dollar of UI benefits
overstates the predicted stimulus UI provides.
Comprehensive Model Needed. The studies showing that
unemployment insurance provides significant economic stimulus
overstate the positive economic effects of additional UI benefits
and ignore the negative effects.
Both the Congressional Budget Office and Zandi assume that UI
recipients consume every dollar spent on UI. The Zandi study
ignores the role of unemployment insurance in extending
unemployment. The CBO acknowledges that UI causes workers
to stay unemployed longer, but argues that this fact presents a
smaller problem in a weak economy. This is also a reasonable
assumption, but research contradicts it. Extended UI benefits have
roughly the same effect in both strong and weak economies.
Unsurprisingly, then, these studies find that extending UI
provides substantial economic benefits. Their methodology is
flawed because it increases aggregate consumption by the full
(or near full) amount of the spending increase on the assumption of
a micro-level liquidity-constraint benefit with no offsetting
account of the micro-level employment effect. This inconsistency
artificially inflates the "bang for the buck."
Most models that overstate the positive effects and ignore the
negative effects of a policy will come to the same conclusion.
Policymakers should not rely on incomplete models to guide economic
policy. Instead they should examine comprehensive models that
account for the full economic effects of unemployment
Dynamic Macroeconomic Model. While extended UI
benefit payments are easily visible, the economic costs of lost
income due to extended unemployment are often unseen, but
equally real. Simulations based on economic theory can reveal these
hidden costs and give policymakers a tool for evaluating
Heritage Foundation analysts used the IHS Global Insight
short-term U.S. Macroeconomic Model to estimate the full
effects of extending UI benefits. The Global Insight model is an
econometric dynamic-equilibrium growth model. The
baseline forecast of the model is the October 2008 baseline.
This baseline accounts for the current economic weakness and the
considerable slack in the labor market.
The effect of increased UI spending was modeled by increasing
the cyclical component of government transfers by the
estimated cost of the policy. The dynamics of the model calculate
the effects on household income, household spending, and household
saving. These first-order effects then make their way through the
economy, affecting employment, prices, investments, and so on.
The employment effect is modeled by estimating the effect
of extended UI benefits on the natural rate of unemployment,
what economists consider full employment unemployment, by the
amount estimated using micro-level studies. For example, a 13-week
extension would increase the number of hours unemployed by an
average of 250 million hours, which is equivalent to about 600,000
workers. This translates into an approximately 0.38 percentage
point higher natural rate of unemployment. (See Appendices A and B
for the details of these calculations.)
Economic Effects of Extended Benefits. The Heritage
Foundation modeled two policy extensions. The first simulates
extending unemployment benefits by 13 weeks to 39 weeks. This
simulates the effect of the legislation that Congress has already
passed in a supplemental appropriations bill. The second simulates
a 20-week extension of the program. This estimates the effect
if Congress increases eligibility for UI benefits an additional 7
weeks above the 39 weeks currently legislated.
The model predicts that the 13-week policy increased the
unemployment rate by 0.16 percentage point. It also predicts
that if Congress passed a 20-week extended benefit package the
unemployment rate would rise by an additional 0.06
percentage point to a total 0.22 percentage point increase in
The model also shows that the 13-week extension already
passed expands GDP by only $5.8 billion from the baseline of
$11.7 trillion, a 0.05 percent increase. This is significantly less
than the $24 billion annual cost of the extension. Passing the
20-week extension depresses the economy relative to the current
13-week extension. Under 20 weeks of extended benefits, GDP
increases by just $4.1 billion, $1.7 billion less than under
the current extended benefits program.
The higher unemployment rates further weaken the economy by
decreasing non-residential investment by $1.4 billion under
the 13-week extension, and by $1.8 billion under the 20-week
extension. Investment creates long-term economic growth by
increasing the productive capacity of the economy. Lower investment
levels results in less output in the future. This suggests that
extending UI benefits has even less stimulus effect in the long
term. The model also forecasts an increasing spread between the
three-month Treasury bill and the ten-year Treasury note
compared to the baseline; this is often viewed as an indicator of
economic weakness and demonstrates the policy's effect of further
weakening the economy.
No Bang for the Buck. How cost-effective are unemployment
benefits in stimulating the economy? After accounting for
their labor-market effects, extended unemployment benefits provide
little stimulus per dollar spent by the government. For the 13-week
extension, the higher consumption is partially offset by higher
unemployment and GDP expands by only 25 cents for each dollar
spent. Spending on extended benefits does not invest in economic
growth. Each dollar spent expands GDP by far less than one
Extending unemployment benefits for an additional seven
weeks to 20 weeks provides even less stimulus, actually reducing
the size of the economy relative to the 13-week extension. For each
dollar of debt the government issues to pay for extended benefits,
GDP grows by just 17 cents. Extended UI benefits reallocate
resources within the economy; they do not create wealth or spur
economic growth. Increasing the debt burden on future taxpayers may
have the appearance of a stimulus, but unless it increases GDP by
more than is spent, it is not.
The purpose of debt is to use current assets to earn greater
returns. This debt financing earns negative returns. Pumping
debt money into the economy may appear as a stimulus while it
is being spent because it eases some liquidity constraints--but
75 to 83 cents of every dollar of that spending is lost.
Therefore, once the spending stops the bubble bursts because the
increases in GDP were artificial. The policy does not increase
investments that will increase the fundamental productivity of the
economy. In fact, the incentives to reduce labor supply
What Congress Needs to Know
Extended unemployment insurance benefits provide little
economic stimulus. The models that claim that unemployment benefits
strongly stimulate the economy ignore the effect of UI in
increasing unemployment and overestimate the amount that
finances new consumption. Consequently, they overstate the economic
stimulus that extended UI benefits provide.
A comprehensive model incorporating the complete effects of
extended UI benefits shows the current 13-week extended
benefits program provides little "bang for the buck." It increases
GDP by only $0.25 per dollar spent. Increasing the duration of UI
benefits by seven more weeks to 46 weeks would hurt the economy,
reducing the already modest effect on GDP to $0.17 per dollar
People respond to incentives. Paying workers not to work does
not stimulate the economy. Because the increased benefits will most
likely be financed by debt, they simply transfer resources from
future taxpayers to UI recipients. The lost production resulting
from increased unemployment diminishes the effect of this spending,
resulting in a negative return. Receiving less GDP than is spent
cannot sustain economic growth.
Sound public policy reasons exist to extend unemployment
insurance benefits. Congress has many humanitarian justifications
for doing so. Many employees have been out of work for over six
months because they cannot find new jobs, not for lack of effort.
Many families receiving extended benefits face dire financial
circumstances. If Congress chooses to extend unemployment
benefits, it should do so because extended benefits are a
humanitarian policy. Congress should not, however, expect
extended UI benefits to improve the economy.
James Sherk is Bradley Fellow in Labor Policy and Karen A.
Campbell, Ph.D., is Policy Analyst in Macroeconomics in
the Center for Data Analysis at The Heritage Foundation.
Economists have conducted extensive research on the
microeconomic effects of unemployment insurance. An optimal
unemployment insurance policy seeks to provide consumption
smoothing for those who find themselves unemployed through no fault
of their own while balancing the competing moral hazard effect--the
incentive to remain unemployed and collecting benefits instead
of working. The behavioral effects of increasing the duration of
unemployment insurance are well documented.
To estimate the extent to which extended benefits increase
unemployment, we estimate the extent to which the 13-week and
20-week extended benefit programs will increase the average
duration of unemployment for those receiving UI insurance. Since a
proportionate increase in the duration of unemployment implies a
proportionate increase in the level of unemployment at any point in
time (though not in the number of workers who enter unemployment),
we can then estimate the extent to which extended benefits increase
To do this, we use estimates from Katz and Meyer (1990).
They find that each week of additional benefits causes UI
recipients to remain unemployed 0.16 to 0.20 weeks longer. For a
13-week extension, this amounts to 2.1 weeks longer
unemployment per UI recipient. This is also the "rule of
thumb" cited by the CBO. For a 20-week extension of benefits,
these estimates imply a 3.2-week extension of time unemployed.
First, we estimated the average percentage of unemployed persons
who receive UI benefits by calculating the average of the ratio of
the total number receiving unemployment insurance to the total
number of unemployed during the last period of extended benefits
between 2002 and 2004. This was found to be 40.6 percent of
Second, Heritage analysts used Bureau of labor Statistics data
to calculate the average duration of unemployment in the 12 months
before Congress extended unemployment benefits to 39 weeks in late
June 2008. This was 16.9 weeks.
Third, Heritage analysts added the 2.1 and 3.2 weeks by which
extended benefits increase the average duration of employment
to the initial average duration of unemployment. This yielded the
average length of time that unemployed workers will remain
unemployed under the 13- and 20-week benefit extensions. This
figure was then divided by the original 16.9 weeks to find the
average increase in unemployment duration for workers across the
economy. This was 12.3 percent for workers under the 13-week
extension, and 18.9 percent under the 20-week extension.
Increasing the duration of unemployment does not directly
increase the number of workers who become unemployed. It
does proportionately increase the number of workers who
remain unemployed at each point in time. The fourth step was
to multiply the model's estimates of the number unemployed in each
quarter by the proportion by which the 13-week and 20-week
extensions increase the duration of unemployment. This was
then multiplied by the 40.6 percent of the unemployed who
receive UI benefits. This gives quarterly estimates of the net
increase in unemployment because of the benefits
Unemployment benefits also indirectly reduce employment. Cullen
and Gruber find that UI crowds out the labor of the wives of
married men. In the absence of unemployment insurance,
working wives would increase their labor supply to help smooth
family consumption. Cullen and Gruber estimate that married women
work an average of 30 hours more per month when their husbands do
not receive unemployment benefits. This does not happen when
families receive extended benefits. Extended UI benefits forestall
an increase in spousal labor supply that would have occurred had
benefits expired after the standard 26-week duration. The economic
opportunity cost of these lost hours should also be accounted for
in evaluating the economic effects of extending UI
To estimate this indirect effect, Heritage analysts estimated
the percentage of workers who are eligible for unemployment
benefits and are married men who have been unemployed for more than
26 weeks using the March 2000 through March 2007 Current Population
Surveys. Workers considered eligible for unemployment insurance
were those who reported that they usually work full time and that
that they were laid off from their last job. This is 4 percent of
all UI-eligible persons.
The average duration of unemployment for these men, conditional
on being unemployed for at least 26 weeks, was again calculated
from the March 2007 CPS. It was found to be 34 weeks. Extended
benefits consequently forestall an average of eight weeks of
increased spousal labor in these families. These families thus lose
added spousal labor for an average of eight weeks out of 13 weeks
per quarter = 0.615 quarters.
To quantify this opportunity cost, the total number of
unemployed per quarter is multiplied by the 40.6 percent of the
unemployed who receive UI benefits to get the total quarterly
number of UI recipients. This number was multiplied by the 4
percent of UI-eligible workers who are married men and who have
been unemployed for at least 26 weeks. This yields an estimate of
the total number of wives affected by the policy per quarter.
To find the total quarterly reduction in (wo)man hours, the
number of affected wives is multiplied by 90 hours less work per
quarter. This is then multiplied by 0.615 quarters that, in
the absence of a UI extension, each wife would have worked more
before her husband found new employment. This yields the total
hourly reduction in spousal labor supply.
Cullen and Gruber did not estimate the effects on husbands'
labor supply of wives' receipt of UI benefits. Research
indicates that while female labor supply is quite elastic to
spousal income, male labor supply is highly inelastic. Rather than
inaccurately impute wives' labor supply response to husbands, it
was assumed that husbands' hours are unaffected by wives' receipt
One caveat to these results is that the Bureau of labor
Statistics does not report completed unemployment durations.
It reports the length of time workers have been unemployed at the
time they are interviewed. This introduces two sources of bias into
estimates of unemployment duration. First, workers who have been
unemployed longer are more likely than workers with short
unemployment spells to be unemployed when interviewed.
Consequently, workers with extended times out of the labor force
are overrepresented in the unemployment duration, biasing the
estimates upward. Second, since most workers do not find work
immediately after being interviewed, they spend additional time out
of work that is not recorded in the unemployment duration. This
biases estimates of unemployment duration downward. Research shows
that the first effect dominates, especially in recessions, so
the Bureau of labor Statistics estimates overstate the average
duration of unemployment.
This artificially inflates Heritage estimates of the positive
stimulus effect of extended UI benefits. This assumption
inflates the denominator when calculating the proportionate
increase in the duration of unemployment. Consequently, Heritage's
CDA analysts understate the extent to which UI increases the
duration of unemployment. To see how this occurs, imagine that the
average duration of a completed spell of unemployment was
actually 15 weeks, while we use the interrupted duration of 16.9
weeks. The estimated increase in unemployment duration
following a 13-week UI extension would then be (15.0 + 2.1) / 15 =
14 percent, instead of the 12.3 percent calculated using the
interrupted duration of unemployment. This artificially
reduces our estimates of the extent to which extended benefits
increase unemployment and harm the economy. Our results should thus
be considered an upper bound on the stimulus effect of
Appendix BMacroeconomic Dynamic
Analysts at The Heritage Foundation used the Global Insight
short-term U.S. Macroeconomic Model to simulate the effect of an
increase in unemployment duration on the U.S. economy as a
The model baseline is the October 2008 baseline with forecasting
assumptions that take into account the current economic distress.
The policy period assumes the policy will be in place until the
baseline unemployment rate declines for two consecutive quarters.
This occurs after the third quarter of 2010.
The unemployment extension experiment was conducted as
STEP 1: Cyclical government transfers were increased by $24
billion annually for the four quarters starting in the fourth
quarter of 2008 through the third quarter of 2010. This variable is
an annual rate in the model. As mentioned above, the CBO estimated
the policy would cost approximately $6 billion per quarter.
STEP 2: The employment effect, due to people's behavioral
changes, increases the average duration of unemployment spells (as
explained in Appendix A). This increases the economy's full
employment unemployment rate. The employment effect is phased in so
that only one-third of the increase in unemployment due to
behavioral changes occurs in the quarter in which the policy is
implemented. Because the baseline assumes that the economy's
natural rate of unemployment is below its current rate, increasing
the natural rate alone brings it closer to the actual rate and,
therefore, when the model calculates the recessionary gap it
"thinks" the economy is improving. For this reason, the actual
unemployment rate is also increased to keep the assumptions
about the baseline recessionary gap constant.
STEP 3: Government spending is also held constant. That is,
no spending offset is assumed as part of the policy.
The Global Insight model has a variable that allows monetary
policy to respond to current economic conditions. The
simulation was conducted without this variable in order that the
fiscal policy effects could be isolated.
The dynamics of the model adjust the level of employment in the
economy to the changes made to the natural rate of unemployment and
the actual unemployment rate variables. The current slack in the
labor market as measured by the recessionary gap, measured by the
difference between the natural rate and actual rate of
unemployment, means that employment adjustments in the short term
will not decrease by the full, long-term level calculated at the
static equilibrium--for example, those levels that were calculated
in Appendix A when all micro-level decisions are aggregated
together. Thus the dynamic model adjusts more slowly to these
changes consistent with macroeconomic patterns, causing the
calculated rate of unemployment estimated in the model to be
0.16 percentage point higher for a 13-week extension and 0.22
percentage point higher for a 20-week extension.
Because of the short duration of the experiment, there are two
"shocks" to the model. The first is the actual policy; the second
is the end of the policy that causes an abrupt return to baseline
values. The short duration of the policy experiment creates
unrealistic fluctuations toward the quarters near these "shock"
points. For this reason, the analysis focuses only on 2009 to
estimate the stimulus effect. If the whole policy experiment period
were included, the moving average annual increase in GDP for the
13-week extension ranges from $0.28 to $0.50 per dollar spent. The
range for the 20-week extension is a $0.25 to $0.44 increase in GDP
per dollar spent.
Simulations were also conducted in order to check the robustness
of the results. This included holding the level of savings constant
in order to determine the effect of assuming more of the UI
dollars are spent than has historically been the case. This
simulation produced negligible changes in the results. This implies
that the fluctuations in savings that occur in the simulation are
not driving the results and, hence, reinforces the point that
assuming all dollars are immediately consumed is an
over-simplification of the economic dynamics that greatly distorts
the effects of this policy.
Another simulation allowed consumer confidence to increase
due to the increased transfers. This heightened consumer stimulus
effect was then held constant and the model was simulated with the
employment effect. The increase in GDP was again minimal.
Extending the policy for longer or shorter durations did
not alter the results substantially.
The model was also estimated allowing a monetary policy
response. It was also run holding the federal funds rate constant.
These simulations improved GDP only slightly. For example, for a
20-week extension, average GDP increases by $0.02 for each dollar
spent. One implication is that a monetary response would be needed
to counteract the negative effects of the fiscal policy. The
combination of all of these responses adds increased
uncertainty and volatility to an already volatile economic
Appendix CMatch Quality Gains from
Some economists have suggested that unemployment insurance
has labor-market effects beyond prolonging the duration of
unemployment. The income that unemployment insurance provides may
enable workers to become more selective about which jobs they
accept. With the government replacing an average of 36 percent of
their wages, workers can delay returning to work while they look
for a better job. This could result in workers ultimately finding
jobs for which they are better suited and are more productive,
fostering economic growth. Acemoglu and Shimer construct a model of
unemployment benefits that finds this result, predicting that
unemployment insurance increases labor market productivity and
encourages the creation of more productive jobs, expanding the
However, if workers on UI take longer to find a job because UI
reduces the incentive to search for new work, not because they are
looking for a better job, UI will not increase the
productivity of workers who return to work. If workers' job
skills deteriorate while they remain unemployed for extended
periods of time, then extended benefits will decrease employee
productivity. Because unemployment insurance has ambiguous
theoretical effects, determining whether UI increases worker
productivity becomes a purely empirical question.
Some studies do find that additional UI benefits increase the
quality of jobs of unemployed workers when they return to work. In
an early study, Ehrenberg and Oaxaca examine cross-sectional
differences in UI replacement rates and find that UI benefits
increase post-employment wages. Burgess and Kingston come
to the same conclusion. Classen, however, examined legislated
changes to UI benefits and found that more generous benefits did
not raise post-employment wages.
More recently, Centeno examines National Longitudinal
Survey of Youth (NLSY) data and finds the unemployed in states with
more generous UI benefits have longer job tenure
post-unemployment than workers in states with less generous
benefits. Böheim and Taylor also find that
workers who stay unemployed longer on UI have longer tenure in the
jobs they take after resuming work.
Other more recent studies, however, find weak to nonexistent
effects of UI on subsequent job quality. Kiefer and Neumann examine
data on workers displaced by international trade and find a
negligible positive effect of UI on subsequent wages.
Meyer finds that experiments that give UI recipients a lump sum
payment speed their return to work without reducing their
post-employment wages. Addison and Blackburn look at Current
Population Survey (CPS) data on displaced workers and find that UI
benefits have, at best, a weak positive effect on earnings.
Recent studies employing "natural experiments" have found that
UI does not improve the jobs that UI recipients find. Van Ours and
Vodopivec examine worker behavior following a "natural
experiment" in Slovakia and find that additional UI benefits
do not increase post-employment wages or tenure. Card et
al. examine changes in match quality following changes in
Austria's UI program. They find no evidence that additional
benefits increase workers' job-match quality.
Those studies that find unemployment insurance improves
productivity or job quality tend to find small and only weakly
statistically significant effects, while many credible studies find
no effects. Of particular importance is the fact that those
studies with the most credible research design, the
natural experiment of the employee response to an exogenous
change in government policy, find no effects of unemployment
insurance on job quality or worker productivity. This work is the
most relevant to this case because policymakers want to know
how workers will respond to a legislated change in UI benefits.
Consequently, Heritage analysts rely on these results and
model extended UI benefits as having no effect on workers'
productivity or wages once they return to employment.
Kyung Won Lee, James R. Schmidt, and George E.
Rejda, "Unemployment Insurance and State Economic Activity,"
International Economic Journal, Vol. 13, No. 3 (Autumn
1999), pp. 77-95.
example, George E. Rejda, "Unemployment Insurance as an Automatic
Stabilizer," The Journal of Risk and Insurance, Vol. 33, No.
2 (June 1966), pp. 195-208.
George M. Von Furstenberg, "Stabilization
Characteristics of Unemployment Insurance," Industrial and Labor
Relations Review, Vol. 29, No. 3 (April 1976), pp. 363-376.
Alan J. Auerbach and Daniel Feenberg, "The Significance of Federal
Taxes as Automatic Stabilizers," Journal of Economic
Perspectives, Vol. 14, No. 3 (2000), pp. 37-56.
Schmidt, and Rejda, "Unemployment Insurance and State Economic
Zandi, "Assessing President Bush's Fiscal
David Card and Phillip B. Levine, "Extended Benefits and the
Duration of UI Spells: Evidence from the New Jersey Extended
Benefit Program," Journal of Public Economics, Vol. 78 (1-2)
(October 2000), pp. 107-138; Lawrence Katz and Bruce Meyer, "The
Impact of the Potential Duration of Unemployment Benefits on the
Duration of Unemployment," Journal of Public Economics,
Vol. 41, No. 1 (1990), pp. 45-72; Stepan Jurajda, "Estimating the
Effect of Unemployment Insurance Compensation on the Labor
Market Histories of Displaced Workers," Journal of
Econometrics, Vol. 108, No. 2 (2002), pp. 227-252; John T.
Addison and Pedro Portugal, "How Does the Unemployment Insurance
System Shape the Time Profile of Jobless Duration?" Economics
Letters, Vol. 85, No. 2 (November 2004), pp. 229-234; Alan B.
Krueger and Bruce D. Meyer, "Labor Supply Effects of Social
Insurance," in A. J. Auerbach and M. Feldstein (ed.), Handbook
of Public Economics, First Edition, Vol. 4 (2002), pp.
2327-2392; and Rafael Lalive, Jan Van Ours, and Josef
Zweimüller, "How Changes in Financial Incentives Affect the
Duration of Unemployment," Review of Economic Studies, Vol.
73, No. 4 (October 2006), pp. 1009-1038.
B. Krueger and Andreas Mueller, "Job Search and Unemployment
Insurance: New Evidence from Time Use Data," IZA Discussion Paper
No. 3667, August 2008, p. 11, at http://ssrn.com/abstract=1261452 (November
Ibid., pp. 20-21. Note that this study
occurred when extended benefits were not in effect, so benefits
expire after the 26th week.
Katz and Meyer, "The Impact of the Potential
Duration of Unemployment Benefits on the Duration of Unemployment."
Note that an elasticity of 0.16 implies that increasing the
duration of unemployment insurance by 13 weeks results in a roughly
two-week longer (13 * 0.16 = 2.08) unemployment spell. Also note
that this is the same estimate used by the Congressional Budget
Office in its 2008 survey of stimulus options.
Raj Chetty, "Moral Hazard Vs. Liquidity and
Optimal Unemployment Insurance," NBER Working Paper No. W13967,
April 2008, at http://ssrn.com/abstract=1122755 (November
Jonathan Gruber, "The Consumption Smoothing
Benefits of Unemployment Insurance," American Economic
Review, Vol. 87 (March 1997), p. 195. Note that a 10 percent
increase in the replacement rate (representing a 10 percent
increase in individual income) reduces the fall in individual
consumption by 2.65 percent. Footnote 9 of this paper notes that
the average recipient obtains 48 cents out of every additional
dollar of which he or she is eligible because not all workers
eligible for benefits receive them. Thus, when UI raises incomes by
4.8 percent, consumption rises by 2.65 percent. Each dollar spent
on UI raises consumption by approximately 55 cents.
J. B. Cullen and J. Gruber, "Spousal Labor
Supply as Insurance: Does Unemployment Insurance Crowd Out the
Added Worker Effect?" Journal of Labor Economics, 18, No. 3
(2000), pp. 546-572.
Eric M. Engen and Jonathan Gruber,
"Unemployment Insurance and Precautionary Saving," Journal of
Monetary Economics, Vol. 47 (June 2001), pp. 545-579.
Stepan Jurajda and Frederick Tannery,
"Unemployment Duration and Extended Unemployment: Benefits in Local
Labor Markets," Industrial and Labor Relations Review, Vol.
56, No. 2 (January 2003). See also Olympia Bover, Manuel Arellano,
and Samuel Bentolila, "Unemployment Duration, Benefit Duration and
the Business Cycle," The Economic Journal, Vol. 112, No. 479
(April, 2002), pp. 223-265. The authors find that receiving UI
benefits has a much larger effect on workers' re-entrance to the
labor force than does the state of the macro economy.
The methodologies, assumptions, conclusions,
and opinions in this Center for Data Analysis (CDA) Report are
entirely the work of CDA analysts. They have not been endorsed by
and do not necessarily reflect the views of the owners of the GI
model. The GI model is used by leading government agencies and
Fortune 500 companies to provide indications to policymakers
of the probable effects of economic events and public policy
changes on hundreds of major economic indicators.
This was the latest baseline available at the
time of publication.
For example, the baseline predicts an average
gap between the natural rate of unemployment and actual
unemployment of 2.25 percentage points.
In both cases it was assumed that extended
benefits would remain in effect until the baseline unemployment
rate declined for two consecutive quarters, which occurs in Q3
Actual job losses are approximately half
those calculated from the employment effect alone. The employment
effect, all else equal, raises unemployment by an average of 0.38
percent and 0.55 percent for 13- and 20-week extensions,
respectively. The dynamic model takes into account the many
other influences on the labor market, such as the current slack in
it, such that actual job losses are lower than the increase in
unemployment from the purely micro-level behavioral response to
longer benefit duration.
Katz and Meyer, "The Impact of the Potential
Duration of Unemployment Benefits on the Duration of
Congressional Budget Office, "Options for
Responding to Short-Term Economic Weakness."
Department of Labor, "Employment and Training
Administration, Unemployment Insurance Weekly Claims Report,"
Continued claims/Haver Analytics and Department of Labor, Bureau of
Labor Statistics, News Release "The Employment Situation," Table
A1, Employment Status of the Civilian Population by Age and Sex,
Department of Labor, Bureau of Labor
Statistics, "The Employment Situation," Table A-9.
Julie B. Cullen and Jonathan Gruber, "Does
Unemployment Insurance Crowd Out Spousal Labor Supply?" Journal
of Labor Economics, Vol. 18, No. 3 (2000).
Rob Valletta, "Recent Trends in Unemployment
Duration," Federal Reserve Bank of San Francisco, Economic Letter
2002-35, November 22, 2002, at http://www.frbsf.org/publications/economics/letter/2002/el2002-35.html (November
13, 2008) and Miles Corak and Andrew Heisz, "Alternative Measures
of the Average Duration of Unemployment," Review of Income and
Wealth, Vol. 42, No. 1 (March 1996).
The federal funds rate is allowed to adjust
due to market forces rather than due to a policy intervention. The
simulation was also run with a monetary policy response. This did
not significantly change the result.
Daron Acemoglu and Robert Shimer,
"Productivity Gains from Unemployment Insurance," European
Economic Review, Vol. 44, No. 7 (June 2000), pp. 1195-1224.
Ronald G. Ehrenberg and Ronald L. Oaxaca,
"Unemployment Insurance, Duration of Unemployment, and Subsequent
Wage Gain," American Economic Review, LXVI(5) (1976), pp.
P. L. Burgess and J. L. Kingston, "The Impact
of Unemployment Insurance Benefits on Reemployment Success,"
Industrial and Labor Relations Review, Vol. 30 (1976), pp.
Kathleen Classen, "The Effect of Unemployment
Insurance on the Duration of Unemployment and Subsequent Earnings,"
Industrial and Labor Relations Review, Vol. 30 (1977), pp.
Mário Centeno, "The Match Quality
Gains from Unemployment Insurance," The Journal of Human
Resources, Vol. 39, No. 3 (Summer 2004), pp. 839-863.
Rene Böheim and M. P. Taylor, "The
Search for Success: Do the Unemployed Find Stable Employment?"
Labour Economics, Vol. 9 (2002), pp. 717-735.
N. M. Kiefer and G. R. Neumann, Search
Models and Applied Labor Economics, (Cambridge: Cambridge
University Press, 1989).
Bruce Meyer, "Lessons from the U.S.
Unemployment Insurance Experiments," Journal of Economic
Literature, Vol. 33, No. 1 (1995), pp. 91-131.
John T. Addison and McKinley L. Blackburn,
"The Effects of Unemployment Insurance on Post-Unemployment
Earnings," Labour Economics, Vol. 7, No.1 (2000), pp.
Jan C. van Ours and Milan Vodopivec,
"Does Reducing Unemployment Insurance Generosity Reduce Job Match
Quality?" Journal of Public Economics, Vol. 92, Nos. 3-4
(April 2008), pp. 684-695.
David Card, Raj Chetty, and Andrea Weber,
"Cash-On-Hand and Competing Models of Intertemporal Behavior: New
Evidence from the Labor Market," The Quarterly Journal of
Economics, Vol. 122, No. 4 (2007), pp. 1511-1560.