Unemployment Insurance: Economic Lessons from the Last Two Recessions | Richmond Fed

The unemployment insurance system provides an important financial cushion for people who have lost their jobs and are actively looking for a new job. system design balances two considerations: benefits and costs.

In terms of benefits, partial wage and salary replacement helps the unemployed return to a relatively normal level of spending on goods and services. In normal times, this system replaces about half of workers’ lost earnings for a duration of about half a year.

Reading: Together aggregate consumption unemployment insurance how

Empirical evidence has shown that the unemployed spend a large fraction of their unemployment insurance income, which also helps the economy as a whole recover faster from a recession. In addition, financial assistance allows workers to search longer for a desirable job, improving productivity and ensuring the longevity of the job match.

In terms of costs, workers who receive unemployment insurance have fewer financial incentives to look for a new job. moreover, they may also turn down suitable job offers in the hope of getting better ones.

In turn, this can also cause companies to create fewer new job openings. If unemployed workers are more able to expect higher wages and posting new vacancies requires some costs, companies can wait to create jobs until these workers are more willing to accept lower wages.

In this economic brief, we review the empirical evidence surrounding these two aspects of unemployment insurance:

• the response of consumer spending to receiving unemployment benefits
• the effect of unemployment benefits on job recovery

We use as a reference the rich literature that has emerged after the last two severe economic episodes: the great recession and the covid-19 pandemic. both periods saw a very large (by historical standards) rise in unemployment and a generous expansion of the unemployment insurance system.

the three categories of unemployment insurance programs

Unemployment insurance programs can be classified into three categories:

• regular unemployment benefits program
• extended benefits program
• emergency benefit program

regular unemployment benefits program

The regular unemployment benefits program is funded by the states. it typically provides 26 weeks of unemployment benefits and replaces about 45 percent of lost earnings. states choose the parameters, such as the replacement rate, the duration of benefits, and who is eligible.

A universal requirement is that workers must have lost their jobs through no fault of their own and be actively looking for a new job. Unemployment insurance does not cover people entering the workforce for the first time, people re-entering the workforce after voluntarily leaving, the self-employed, and temporary workers.1

extended benefits program

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The Extended Benefits Program provides an additional 13 to 20 weeks of unemployment insurance to people who have exhausted their regular benefits and who live in states experiencing a severe economic downturn. Extended benefits are triggered by changes in the level or rate of increase in a state’s unemployment rate, and funding for the benefits is split between the state and federal government.

emergency benefit program

During an economic crisis, the federal government may pass laws to provide additional unemployment insurance in terms of a longer duration of benefits and/or a higher replacement rate. Historically, emergency unemployment insurance has been fully funded by the federal government.

In response to the Great Recession, Congress significantly extended the duration of unemployment benefits. Emergency Unemployment Compensation (EUC) provided an additional 34 weeks of unemployment benefits to all states on a uniform basis, while states with a very high unemployment rate were eligible for an additional 13-19 weeks. therefore, people in states with very high unemployment were eligible for a maximum of 99 weeks of benefits:

• 26 weeks of the regular program
• 20 weeks of extended benefits
• 53 weeks of euc

In response to unprecedented job losses due to COVID-19, Congress passed the Cares Act in March 2020, which provided a $600 weekly supplement to unemployed workers on top of any regular unemployment benefits. this supplement meant that total unemployment benefits replaced about 1.5 times the median worker’s lost earnings. the $600 supplement expired at the end of July 2020 and a $300 supplement was enacted in January 2021 for the period through September 2021 (after initially being enacted for only six weeks).

An additional provision was the expansion of benefits for self-employed individuals, part-time workers, and those who would not otherwise qualify for regular unemployment compensation. In addition, people who were unable or unavailable to work due to the health consequences of the covid-19 pandemic were also considered eligible.

how spending affects unemployment insurance

Traditionally, consumer response to government programs is difficult to measure. Consumption data are sparse and often riddled with significant measurement errors, making statistical inference difficult and imprecise.

In a series of articles, Peter Ganong and Pascal Noel overcome this problem by using individual-level transactions with credit and debit cards. In their 2019 article “Consumer Spending During Unemployment,” they tracked people’s bank accounts between 2014 and 2016 and documented the following patterns:

• Spending decreases by about 6 percent when unemployment begins and remains at this level for the duration of unemployment.
• People who find a new job slowly increase their spending, but they don’t reach the same spending level as before unemployment, even a year after returning to work.
• People further reduce their expenses by another 12 percent if they don’t have a new job when their benefits expire.

Overall, the authors estimate that an additional dollar of unemployment insurance results in $0.27 spent on nondurable goods.

The authors (with additional co-authors) extended their exercise to study the consumption response of unemployment recipients to the $600 supplement provided by the care law. According to its 2021 working paper “Expanding and Job Search Impacts of Expanded Unemployment Benefits,” both the income and spending of unemployment recipients at the start of the pandemic increased by about 25% and 20%. %, respectively, relative to pre-pandemic levels. . This finding is explained by the large replacement rate provided by the care law for unemployed people (as mentioned, about 1.5 times the usual weekly earnings).

on the other hand, the spending of the employed decreased during the first months of the pandemic. this is consistent with the findings of raj chetty and co-authors’ 2020 working paper “the economic impacts of covid-19,” which documents that high-income households experienced a larger decline in spending (30 percent) between february and the bottom of March than low-income households (20 percent).

how unemployment insurance affects work: individual workers

While there are only a few articles documenting the response of consumption to unemployment insurance, there is a large body of literature analyzing the employment effects of extending unemployment benefits.

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In their 2010 article “Job Search and Unemployment Insurance,” Alan Krueger and Andreas Mueller find that the maximum weekly benefit amount for workers eligible for unemployment insurance reduces the time they spend looking for work. In addition, they find that job searches intensify in the weeks before benefits run out and decline after they end, suggesting that unemployed people feel discouraged about their job prospects.

Although researchers agree that unemployment insurance prolongs periods of unemployment for beneficiaries, it is estimated that the effects are usually small. In his article “Unemployment Insurance and Job Search in the Great Recession,” Jesse Rothstein finds that unemployment insurance extensions have small negative effects on the probability that eligible unemployed people will find work.

how unemployment insurance affects work: companies and job offers

However, unemployment benefits can also affect the overall job search rate. Creating and filling jobs is expensive for any company, and if job offers are more likely to be rejected, companies might create fewer openings in the first place. In addition, unemployment insurance can increase production labor costs by allowing unemployed workers to expect higher wages, further deterring some businesses (especially unproductive units) from posting new positions or actively seeking new candidates.

In fact, a decline in firms’ hiring efforts has been proposed to explain the divergence after the Great Recession between the relatively high number of job openings created and the slow recovery in employment.

However, there is conflicting evidence regarding the macro effects of unemployment insurance. In the “Job and Jobless Benefits in the Great Recession” working paper, Marcus Hagedorn and co-authors used employment data from the Great Recession to compare employment recovery from adjacent counties but in different states. this method allowed the authors to compare similar economic entities (adjacent counties) that experience changes in unemployment insurance for reasons linked to state performance and not necessarily their own.

The authors find that counties that extend the duration of unemployment benefits experience large negative employment effects compared to neighboring counties across state lines that do not. interpret their findings as capturing the macro effect of unemployment insurance: unemployment benefits affect firms’ decisions to create vacancies.

On the other hand, the 2021 paper “Unemployment Insurance Generosity and Aggregate Employment” by Christopher Boone and his co-authors employs the same research design but uses a different data set and longer time period. the authors find that the negative macro effects of unemployment insurance are much smaller. and subsequent research using data on job applications and the change in real-time measurement error of the unemployment rate also point to a small macro effect of unemployment insurance. (Examples include Ioana Marinescu’s 2017 article “The General Equilibrium Impacts of Unemployment Insurance” and Gabriel Chodorow, John Coglianese, and Loukas Karabarbounis’ 2019 article “The Macro Effects of Extensions of Unemployment Benefits”) .

how unemployment insurance impacts work: covid-19

How did the generous unemployment insurance supplement affect job supply decisions during the pandemic? the first type of evidence shows a modest or null effect of unemployment insurance on employment. The 2020 “Employment Effects of Unemployment Insurance Generosity During the Pandemic (pdf)” Working Paper by Joseph Altonji and co-authors found that hourly workers in small businesses with a larger expansion in their replacement rate did not experienced differential declines in employment relative to workers with less expansion in their replacement rate after the passage of the care law. Arindrajit Dube’s 2021 working paper “Aggregate Effects of Unemployment Benefits on Employment During Deep Recessions” also finds little impact on job earnings from the benefit.

Based on the same bank-level data mentioned above (i.e., individual-level debit and credit card transactions), the aforementioned paper “Spending and Job Search Impacts of Expanded Unemployment Benefits” finds negative but small effects of unemployment insurance. the authors also document substantial instability in the pandemic labor market, with entries and exits four times higher than usual.

conclusion

Unemployment insurance provides an important safety net for people who lose their jobs. There is a broad consensus on the stimulating effects of unemployment insurance on consumer spending. unemployed workers experience large declines in spending during the unemployment period, and the evidence suggests that the decline would be substantially larger without the unemployment supplement.

But there is widespread disagreement about how much unemployment insurance discourages unemployed people from quickly re-entering the workforce. it is important to recognize all aspects of the unemployment insurance system so that policymakers can offer long-term financial assistance without significantly disrupting the labor market.

marios karabarbounis is an economist in the research department of the richmond federal reserve bank.

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