Extending UI Benefits at Short versus Long Durations
Extending the number of weeks during which unemployed workers are eligible for unemployment insurance (UI) benefits has a more pronounced effect on the overall jobless rate when benefit durations are short than when they are already long. This is a key finding of Macroeconomic Effects of UI Extensions at Short and Long Durations (NBER Working Paper 31784) by Miguel Acosta, Andreas I. Mueller, Emi Nakamura, and Jón Steinsson.
The researchers explore the effect of UI benefit duration extensions by exploiting the fact that states can adopt different UI trigger rule “options” that affect the difficulty of qualifying for UI extensions. Typically, states offer 26 weeks of regular UI benefits. In 1970, the federal government instituted the Extended Benefits program, which triggers additional weeks of benefits when certain economic conditions are met. Some parts of this program are optional and not all states have chosen to adopt them. The UI trigger rule options that states adopt likely depend on different views on the costs and benefits of UI. In practice, adoption of more lenient trigger rules has been correlated with political preferences:10 of the 12 states that did not adopt the fully funded federal program of Extended Benefits in 2012 voted Republican in t he 2008 presidential election. The researchers develop a novel empirical strategy to leverage variation in UI benefit durations associated with a state’s choice of trigger rule options while controlling for local economic conditions.
Extending the duration of unemployment insurance benefits raises the unemployment rate by more when benefit durations are short than when they are already long.
The researchers estimate the impact of UI benefit extensions by analyzing weekly state-level data for the last four decades. They compare the effect of a typical 13-week UI extension for cases with initial benefit durations of less than 60 weeks versus more than 60 weeks. For the short initial benefit duration case, a 13-week UI extension leads to a 0.28 percentage point increase in the unemployment rate and to a 0.6 percentage point increase in the fraction of the labor force collecting UI. For the long initial benefit duration case, however, there is virtually no change in the overall unemployment rate. The fraction of the labor force receiving UI increases by about 0.23 percentage points.
The researchers argue that the unemployment rate reacts less to UI extensions when benefit durations are already long because many fewer workers are affected by these extensions. Between 1994 and 2021, the median duration of an unemployment spell was only 11 weeks. This implies that relatively few workers were affected by UI benefit extensions that only kicked in when the UI benefit duration was already 60 weeks or more.
The researchers find larger effects on the unemployment rate when including data from the period of the COVID-19 pandemic. In this sample, the unemployment rate rises by 0.44 percentage points in response to a standard 13-week extension when benefit durations are short. The fraction of the labor force on UI rises by 0.9 percentage points. The impact of extensions when benefit durations are already longer than 60 weeks remains negligible.
The researchers suggest that the larger unemployment effects of COVID UI extensions may have arisen for several reasons. First, as a result of the federal top-up of UI benefits, the median percentage of lost earnings replaced by UI benefits was 145 percent in mid-2020 compared with 50 percent in more typical periods. Moreover, benefit eligibility was extended to nontraditional workers, such as contractors and gig workers. Second, unemployment benefits during COVID were widely publicized and likely particularly salient. Third, the COVID recession saw many temporary layoffs, because the downturn was expected to be short, which earlier research suggests may lead to larger effects of UI extensions on unemployment.
— Steve Maas
