Unemployment Insurance Duration Extensions (Variation Across States – 1990)

Unemployment insurance in the United States is administered on a state-by-state basis, with funding coming from both state and federal sources, along with contributions from payroll taxes paid by workers and firms. Both the amount of benefits and eligibility requirements vary by state. Generally speaking, benefits are available to workers who have lost their jobs for reasons outside of their control.

Hendren and Sprung-Keyser (2020) draw upon estimates of willingness to pay and the fiscal externality of unemployment insurance from Schmieder and Von Wachter (2016) to compute the MVPF for a range of unemployment insurance policy variations.

MVPF SUMMARY

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Katz and Meyer (1990) use time-varying cross-state variation in UI program parameters to identify effects on labor supply. Schmieder and von Wachter (2016) show that their estimates of the impact of duration extensions suggests every $1 of spending yields $1.30 in benefits and costs on net $2.89, for an MVPF of $1.30 / $2.89 = 0.45.

Methodology for Calculating the MVPF of Unemployment Insurance

There is a large literature studying optimal UI policies, often focused on estimating the “Baily-Chetty” condition (Baily (1978); Chetty (2006)). The Baily-Chetty condition asks whether individuals are willing to pay the net cost of additional unemployment insurance. The WTP for $1 of additional UI benefits is often measured as

so that individuals are willing to pay more than $1 to the extent to which they are risk averse, measured by the coefficient of relative risk aversion, gamma, and the extent to which they experience a consumption drop upon unemployment.

The cost of $1 of UI can be written as 1+FE, where the fiscal externality from providing $1 of additional unemployment insurance is measured from the impact of additional UI on unemployment duration.

If individuals were required to pay the cost of their additional unemployment insurance benefits, then additional UI would increase (decreases) welfare if the consumption smoothing benefit is greater (less) than FE. But in practice, beneficiaries of additional UI benefits are not necessarily the ones who pay for the cost of those benefits. Therefore, Hendren and Sprung-Keyser (2020) use these same components to estimate the MVPF of UI:

While the Baily-Chetty condition generally thinks of UI as solely a social insurance policy; the MVPF places UI in the broader context of policies with distributional incidence. This means that additional spending on UI benefits may be desirable not solely because of its correction of market failures, but also because it could be a more efficient method of redistribution.

Hendren and Sprung-Keyser (2020) build their sample of variation in unemployment insurance policies using the survey article of Schmieder and Von Wachter (2016). They survey the literature on two types of policy changes to unemployment insurance: (i) changes in the size of benefits and (ii) changes in the duration of benefit availability. Conveniently, Schmieder and Von Wachter (2016) provide estimates of both the WTP and the FE from UI expansions. Hendren and Sprung-Keyser (2020) restrict this sample to policy changes in the United States and for which Schmieder and Von Wachter (2016) provide a fiscal externality estimate.