NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Why do Unemployment Benefits Raise Unemployment Durations? Moral Hazard vs. Liquidity

Raj Chetty

NBER Working Paper No. 11760
Issued in November 2005
NBER Program(s):   LS   PE

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.

download in pdf format
   (491 K)

email paper

This paper is available as PDF (491 K) or via email.

This paper was revised on March 17, 2006

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w11760

Users who downloaded this paper also downloaded these:
Katz and Meyer w2741 The Impact of the Potential Duration of Unemployment Benefits on the Duration of Unemployment
Chetty w13967 Moral Hazard vs. Liquidity and Optimal Unemployment Insurance
Meyer w2546 Unemployment Insurance And Unemployment Spells
Farber and Valletta w19048 Do Extended Unemployment Benefits Lengthen Unemployment Spells? Evidence from Recent Cycles in the U.S. Labor Market
Hagedorn, Karahan, Manovskii, and Mitman w19499 Unemployment Benefits and Unemployment in the Great Recession: The Role of Macro Effects
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us