Unemployment Benefits and Unemployment in the Great Recession: The Role of Macro Effects

By Marcus Hagedorn Fatih Karahan, Iourii Manovskii and Kurt Mitman

NBER Working Paper No. 19499 (2013)

NBER Working Paper No. 19499

Abstract

We exploit a policy discontinuity at U.S. state borders to identify the labor market implications of unemployment benefit extensions. In contrast to the existing literature that focused on estimating the effects of benefit duration on job search decisions by the unemployed – the micro effect – we are guided by equilibrium labor market theory and focus on measuring the general equilibrium macro effect that operates through the response of job creation to benefit extensions. After developing a new methodology to measure the macro effect, we find that it is this effect that is very important quantitatively. In particular, benefit extensions raise equilibrium wages and lead to a sharp contraction in vacancy creation, employment,and a rise in unemployment.

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Published Feb. 16, 2015 10:49 AM - Last modified Oct. 27, 2017 1:02 PM