The Macro Effects of Unemployment Benefit Extensions: a Measurement Error Approach*

Abstract

By how much does an extension of unemployment benefits affect macroeconomic outcomes such as unemployment? Answering this question is challenging because U.S. law extends benefits for states experiencing high unemployment. We use data revisions to decompose the variation in the duration of benefits into the part coming from actual differences in economic conditions and the part coming from measurement error in the real-time data used to determine benefit extensions. Using only the variation coming from measurement error, we find that benefit extensions have a limited influence on state-level macroeconomic outcomes. We apply our estimates to the increase in the duration of benefits during the Great Recession and find that they increased the unemployment rate by at most 0.3 percentage point.

Sovereign Default Risk and Firm Heterogeneity

“…An active research agenda centers on using micro data to inform aggregate structural models. Researchers have used related "micro-to-macro" approaches to understand the mechanisms from monetary policy to consumption (Kaplan, Moll, and Violante, 2018), unemployment benefit extensions on labor market outcomes (Hagedorn, Karahan, Manovskii, and Mitman, 2013;Chodorow-Reich, Coglianese, and Karabarbounis, 2018), quantifying the losses from international trade (Lyon and Waugh, 2018;Caliendo, Dvorkin, and Parro, forthcoming), measuring the effects from volatility shocks at the firm level on aggregates during the Great Recession (Arellano, Bai, and Kehoe, 2016), or gauging the impact of declining real interest rates on input misallocation and aggregate productivity (Gopinath, Kalemli-Ozcan, Karababounis, and Villegas-Sanchez, 2015). To the best of our knowledge, our paper is the first to apply a similar set of tools to study the macroeconomic conse-quences of sovereign debt crises.…”

The Aggregate Implications of Regional Business Cycles

“…In particular, Hagedorn et al (2016) suggest that the large aggregate extension of unemployment benefits during the Great Recession caused the aggregate unemployment rate within the US to increase by roughly 2 percentage points. However, Chodorow-Reich et al (2018) use a different methodology and suggest that the effect of the large unemployment benefit extension only had a negligible effect on aggregate unemployment rates. To the extent that such aggregate policy changes did affect aggregate employment during the Great Recession, it would show up as a negative aggregate labor supply shock in our methodology.…”

Unintended Consequences of Unemployment Insurance Benefits: The Role of Banks

“…Motivated by the slow recovery of the U.S. labor market in the aftermath of the financial crisis, several papers examine the role of higher UI generosity in increasing the reservation wages of employees, and therefore decreasing the job creation incentives of firms (Chodorow-Reich, Coglianese, and Karabarbounis, 2018;Hagedorn, Manovskii, and Mitman, 2015;Hagedorn, Karahan, Manovskii, and Mitman, 2018). 3 Our paper provides an alternative mechanism that may explain the slow recovery of the U.S. labor market.…”