Working Paper

These Caps Spilleth Over: Equilibrium Effects of Unemployment Insurance

Abstract: The design of US unemployment insurance (UI) policy--which features benefits assigned as a percentage of past wages up to a cap--engenders tests for spillovers from policy variation to workers who are not directly treated. We test for and find a pattern of spillovers from state-level UI policy changes that cannot be neatly reconciled with workhorse or cutting-edge models of UI spillovers. Instead, we show that the documented pattern conforms with the predictions of a canonical model of information frictions: wage posting with random search. Taken together, our results provide novel evidence of quantitatively- and policy-relevant information frictions in this market. Moreover, our estimates suggest that aggregate unemployment of insured individuals would decrease if the replacement rate were increased while holding the cap constant.

JEL Classification: J65; J64; D62; H23; J42; D42; D83;

https://doi.org/10.17016/FEDS.2022.074

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2022-11-04

Number: 2022-074

Pages: 69 p.