A Quantitative Analysis of Unemployment Beneﬁt Extensions
February 8, 2011First draft: January 19, 2010
This paper measures the eﬀect of extensions of unemployment insurance (UI) beneﬁtson the unemployment rate using a calibrated structural model that features job search andconsumption-saving decision, skill depreciation, UI eligibility, and UI beneﬁt extensionsthat capture what has happened during the current downturn. I ﬁnd that the extensions of UI beneﬁts contributed to an increase in the unemployment rate by 1.2 percentage points,which is about a quarter of an observed increase during the current downturn (a 5.1 per-centage point increase from 4.8 percent at the end of 2007 to 9.9 percent in the fall of 2009). Among the remaining 3.9 percentage points, 2.4 percentage points are due to thelarge increase in the separation rate, while the staggering job-ﬁnding probability contributes1.4 percentage points. The last extension in December 2010 moderately slows down therecovery of the unemployment rate. Speciﬁcally, the model indicates that the last extensionkeeps the unemployment rate higher by up to 0.4 percentage point during 2011.JEL Classiﬁcation: J64, J65, E24, D83Keywords: Unemployment Insurance, Extension, Labor Market, Search, ConsumptionSmoothing
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. An earlier and simpler version of the paper was circu-lated under the title “Unemployment Insurance and Unemployment Beneﬁts.” I thank Satyajit Chatterjeefor his valuable comments as well as encouragement and Shigeru Fujita for stimulating discussion on relatedtopics. The views expressed here are those of the author and do not necessarily reﬂect the views of the Fed-eral Reserve Bank of Philadelphia or the Federal Reserve System. This paper is available free of charge athttp://www.philadelphiafed.org/research-and-data/publications/working-papers/.