Unemployment Benefits and Unemployment in the Great Recession: The Role of Equilibrium Effects

RePEc Short ID: pmi418
ORCID iD: 0000-0003-3631-1073

Hagedorn, Marcus; Karahan, Fatih; Manovskii, Iourii; Mitman, Kurt

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Unemployment Benefits and Unemployment in the Great Recession: The Role of Equilibrium Effects

Abstract: Equilibrium labor market theory suggests that unemployment benefit extensions affect unemployment by impacting both job search decisions by the unemployed and job creation decisions by employers. The existing empirical literature focused on the former effect only. We develop a new methodology necessary to incorporate the measurement of the latter effect. Implementing this methodology in the data, we find that benefit extensions raise equilibrium wages and lead to a sharp contraction in vacancy creation and employment and a rise in unemployment.

Keywords: unemployment insurance; unemployment; employment; vacancies; wages; search; matching;

JEL Classification: E24; J63; J64; J65;