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Unemployment Insurance and Job Search in the Great Recession

While the so-called "Great Recession" officially ended in June 2009, the labor market remains stagnant. In September 2011, the unemployment rate remained above nine percent—it has fallen below that threshold for only 2 of the last 29 months—and nearly 45%of the unemployed had been out of work for more than six months.

An important part of the policy response to the Great Recession has been a dramatic expansion of Unemployment Insurance (UI) benefits. Preexisting law provided for up to 26 weeks of benefits, plus up to 20 additional weeks of "Extended Benefits" (EB) instates experiencing high unemployment rates. But Congress has frequently authorized additional weeks on an ad hoc basis in past recessions, and starting in June 2008 it enacted a series of UI extensions that brought statutory benefit durations to as long as 99 weeks.

Unemployment benefits subsidize continued unemployment. Thus, it seems likely that the unprecedented UI extensions have contributed to some degree to the elevated unemployment rate. However, the magnitude and interpretation of this effect is not clear. Several recent analyses have found that extensions of UI benefits con tributed around 1.0 percentage points to the unemployment rate in 2010 and early 2011 (see, e.g., Mazumder, 2011; Valetta and Kuang, 2010; Fujita, 2011), while some observer shave claimed that the effects were several times that size (Grubb, 2011; Barro, 2010).

There are two channels by which UI can raise unemployment, with very different policy implications (Solon, 1979). On the one hand, UI extensions can lead recipients to reduce their search effort and raise their reservation wages, slowing the transition into employment. On the other hand, UI benefits—which are available only to those engaged inactive job search—also provide an incentive for continued search fort hose who might otherwise have exited the labor force. The latter raises measured unemployment but has no effect—or possibly even a positive effect—on the reemployment of displaced workers. Based in part on this observation, Howell and Azizoglu (2011) find "no support" for the view that UI extensions have reduced employment. Unfortunately, most studies of the effect of UI on the duration of unemployment have been unable to distinguish the two channels.

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Unemployment Insurance and Job Search in the Great Recession