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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;

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Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2015-02-01

Number: 646

Note: Previous Title: "Unemployment Benefits and Unemployment in the Great Recession: The Role of Macro Effects"