Extended UI benefits in the aftermath of the Great Recession raised the average duration of unemployment by 7 percent and caused the unemployment rate to increase by 0.4 percentage points.
Extensions of the number of weeks for which unemployed workers were able to receive unemployment insurance (UI) benefits in the previous two recessions caused these beneficiaries to stay unemployed a little longer than usual, according to new research by Henry Farber and Robert Valletta. In Do Extended Unemployment Benefits Lengthen Unemployment Spells? Evidence from Recent Cycles in the U.S. Labor Market (NBER Working Paper No. 19048), the authors report that extended UI benefits did not delay the unemployed from getting jobs. Rather, it delayed them from exiting the workforce entirely. Although this effect is relatively small, it is large enough for extended benefits to make a substantial contribution to the increase in long-term unemployment in recent years.
Since extended benefits became available in different states at different times, the authors were able to exploit the differences in the timing of extensions, and in their length, to estimate the disincentive effect of UI benefits through late 2012. They conclude that "... extending unemployment insurance benefits in weak labor markets has virtually no effect on the rate of job finding but, on average, unemployment spells are somewhat longer as a subset of UI recipients remain nominally unemployed rather than exit the labor force."
During the last few years, unemployed workers were eligible to receive UI benefits for an unprecedented maximum of 99 weeks in most states, compared with the normal UI availability of 26 weeks. The study finds that these extended UI benefits in the aftermath of the Great Recession prolonged the average duration of unemployment by 7 percent and caused the unemployment rate to increase by an extra 0.4 percentage points. The same dynamic occurred during the much milder downturn of the early 2000s, but the effects were smaller because the extension of benefits was not as widespread, or as generous, as in the Great Recession.
Past empirical research has produced a range of estimates regarding the disincentive effects of UI benefits on job search in the United States. The authors note that extending UI benefits today is probably less of a disincentive to finding a job than it used to be. In the 1970s and 1980s, companies often used temporary layoffs to reduce their workforce during downturns, and sometimes timed their recalls to coincide with the end of unemployment insurance benefits. This is less common now. More generally, job availability during the Great Recession and its aftermath was so limited, and extended benefits were so much more widely available than in previous downturns, that past results regarding disincentive effects may not apply.
The study notes that even in recessions, the vast majority of the unemployed find jobs relatively quickly. In the aftermath of the mild recession of 2001, for example, only about 10 percent of unemployment spells lasted at least 6 months. The corresponding percentage in the aftermath of the Great Recession was only slightly higher, at 13.7 percent. Thus, extended unemployment benefits affect only a minority of job losers. After the 2001 recession, job losers whose unemployment duration placed them in the top fifth of the distribution were unemployed for an average of 5.4 months. The authors estimate that this group experienced one extra week of unemployment due to extended benefits. By contrast, in the aftermath of the Great Recession, during 2009-11, individuals in the top fifth of the unemployment distribution were unemployed for an average of 6.8 months, and experienced about two extra weeks of unemployment due to extended benefits.
The study concludes that extended UI benefits boost the unemployment rate slightly, accounting for 0.12 percentage points of the 5.4 percent U.S. unemployment rate in 2003 and 0.40 percentage points of the 9 percent unemployment rate in 2010. However, among unemployment spells that last at least six months, extended UI has a larger effect and may account for up to one quarter of observed long-term unemployment.