Is there a long-run relationship between the unemployment insurance and the labor force participation rate in the USA? A nonlinear analysis

Abstract

PurposeThis paper explores the evidence of a long-run co-movement between aggregate unemployment insurance spending and the labor force participation rate in the USA. The unemployment insurance (UI) program tends to expand during an economic downturn and contract during an expansion. UI may incentivize unemployment and may also facilitate better matching in the labor market. Statistical evidence of the presence of a co-movement will thus shed new light on their dynamics.Design/methodology/approachThis research applies time-series econometric approach using monthly data from 1959:1 to 2020:3 to test threshold cointegration and estimate a threshold vector error-correction (TVEC) model. The estimates from the TVEC model investigating the nature of short-run dynamics.FindingsThe Enders and Siklos (2001) test find evidence of threshold cointegration between the two indicating the presence of long-run co-movement. The estimates from the TVEC model investigating the nature of short-run dynamics find evidence that the growth in aggregate UI spending and the growth in labor force participation rate adjust simultaneously to maintain the long-run co-movement above the threshold in the short run. The author also observes the same short-run dynamics for the growth in aggregate UI spending and the growth in the labor force participation rate for females.Research limitations/implicationsThis model is bi-variate by construction and does not address causality.Practical implicationsThe author argues that the UI program positively impacts the female labor market outcomes, for example, better matching. This finding may explain the upward trend in the labor force participation rate for females in the USA.Social implicationsThe research findings may justify the transfer programs for minority and immigrants.Originality/valueThis is first research that analyzes the UI programs impact on the labor force participation using a macroeconometric approach. To the best of the author's knowledge, this is the first study in this genre.

Title: Income inequality, unemployment, and government transfer: what does their dynamics tell us

“…Both these unemployment rates remain high for about two years in the forecast horizon. These ndings are akin to Johnston and Mas (2018) and Ahmed (2022). Perhaps an increase in government transfer disincentivizes the labor supply.…”

“…We employ three separate estimations to develop objective insight into their dynamics. We use annual time series data on the income share ratio between the top 10 percent to bottom 50 percent and the top 10 percent to bottom 20 percent of income earners in the United States (henceforth income ratio) as a measure of income inequality, unemployment rates for male and female, and growth in government transfer to persons from 1962 to 2019 3 . The data on unemployment rates and aggregate government transfer to persons in the United States are collected from the Federal Reserve Bank of St. Louis electronic database, popularly known as the Fred database.…”

Unemployment, Economic Growth, and Government Expenditure in West Java: Perspectives from Dynamic Panel Model

“…The rise in labor force participation suggests that more people are entering the labor market to work or find work, thus reducing the open unemployment rate (H. A. Ahmed, 2022;Nemore et al, 2021).…”