This paper uses two data sets to examine the impact of the potential duration of unemployment insurance (UI) benefits on the duration of unemployment and the time pattern of the escape rate from unemployment in the United States. The first part of the empirical work uses a large sample of household heads to examine differences in the unemployment spell distributions of UI recipients and nonrecipients. Sharp increases in the rate of escape from unemployment both through recalls and new job acceptances are apparent for UI recipients around the time when benefits are likely to lapse. The absence of such spikes in the escape rate from unemployment for nonrecipients strongly suggests that the potential duration of UI benefits affects firm recall policies and workers' willingness to start new jobs. The second part of our empirical work uses accurate administrative data to examine the effects of the level and length of UI benefits on the escape rate from unemployment of UI recipients. The results indicate that a one week increase in potential benefit duration increases the average duration of the unemployment spells of UI recipients by 0.16 to 0.20 weeks. The estimates also imply that policies that extend the potential duration of benefits increase the mean duration of unemployment by substantially more than policies with the same predicted impact on the total UI budget that raise the level of benefits while holding potential duration constant.

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Abstract: This paper assesses the cost and benefits of extensions in the duration of unemployment insurance (UI) benefits in recessions. Using multiple sharp eligibility thresholds by age in the German UI system we obtain regression discontinuity estimates for the effect of extensions in the duration of UI benefits. Using the universe of unemployment spells and career histories we implement this strategy for twenty years and across industries and correlate with measures of the business cycle. We find large extensions in UI durations have modest effects on non-employment durations that are similar across demographic groups, but have no effects on measures of job quality, or longer-term job and employment outcomes. While the non-employment effects of UI extensions we find are at best declining somewhat in large recessions, the effect on benefit duration (a measure of the UI exhaustion rate) is strongly countercyclical. Our findings imply that large expansions in UI duration during recessions are unlikely to lead to sizable increases in unemployment duration or the unemployment rate, to contribute to unemployment persistence, or to lead to worsening job outcomes for the long-term unemployed. Moreover, we show that in a model of job search with liquidity constraints, increases in the welfare benefits of UI extensions in recession, as indicated by the UI exhaustion rate, are likely to outweigh the welfare costs in terms of higher non-employment and program durations.

Abstract This paper studies how changes in the two key parameters of unemployment insurance – the benefit replacement rate (RR) and the potential duration of benefits (PBD) – affect the duration of unemployment. To identify such an effect we exploit a policy change introduced in 1989 by the Austrian government which affected various unemployed workers differently: a first group experienced an increase in RR; a second group experienced an extension of PBD; a third group experienced both a higher RR and a longer PBD; and a fourth group experienced no change in the policy parameters. We find that unemployed workers react to the disincentives by an increase in unemployment duration and our empirical results are consistent with the predictions of job search theory. We use our parameter estimates to split up the total costs to unemployment insurance funds into costs due to changes in the unemployment insurance system with unchanged behavior and costs due to behavioral responses of unemployed workers. Our results indicate that costs due to behavioral responses are substantial. JEL Classification: C41, J64, J65

This paper analyzes the impact of the Austrian Regional Extended Benefit Program (REBP) on the labor market outcomes for elderly workers in Austria. The REBP extended entitlement to regular unemployment benefits from 30 weeks to a maximum of 209 weeks for elderly indi-viduals in certain regions. We find that the tremendous increase in unemployment associated with REBP was mainly due to severe labor market problems in the steel sector in treated regions. We also find that prolonged benefit entitlement led to a small increase in the inflow to and a moderate decrease in the outflow from unemployment. The REBP induced a strong increase in early retirement and in many cases, in particular for steel workers, entering unem-ployment meant withdrawal from the labor force. Finally, there were non-negligible effects of extended benefits on the level and the distribution of wages.

This paper measures the effect of the ongoing extensions of unemployment insurance (UI) benefits on the unemployment rate using a calibrated structural model that features job search and consumption-saving decisions, skill depreciation, UI eligibility, and UI benefit extensions that capture what has happened in response to the recent downturn. I find that the extensions of UI benefits contributed to an increase in the unemployment rate by 1.4 percentage points, which is about 30 percent of an observed increase between the periods 2005-2007 and 2009-2011 (4.8 percent). Among the remaining 3.4 percentage points, 2.5 percentage points are due to the large increase in the separation rate, while the reduced job-finding rate due to lower productivity contributes 0.9 percentage point. Moreover, the contribution of the UI benefit extensions to the elevated unemployment rate increased from 2009 to 2011; while the number of vacancies has been recovering, the unemployment rate has remained elevated because of the successive extensions. The last extension in December 2010 has moderately slowed down the recovery of the unemployment rate. Specifically, the model indicates that the last extension keeps the unemployment rate higher by 0.6 percentage point during 2011.

It is well known that unemployment benefits raise unemployment durations. This result has traditionally been interpreted as a substitution effect caused by a distortion in the price of leisure relative to consumption, leading to moral hazard. This paper questions this interpretation by showing that unemployment benefits can also affect durations through an income effect for agents with limited liquidity. The empirical relevance of liquidity constraints and income effects is evaluated in two ways. First, I divide households into groups that are likely to be constrained and unconstrained based on proxies such as asset holdings. I find that increases in unemployment benefits have small effects on durations in the unconstrained groups but large effects in the constrained groups. Second, I find that lump-sum severance payments granted at the time of job loss significantly increase durations among constrained households. These results suggest that unemployment benefits raise durations primarily because of an income effect induced by liquidity constraints rather than moral hazard from distorted incentives.

Paper prepared for the Advisory Council on Unemployment Compensation, whose support is

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views of the institute.