Unemployment Insurance Duration Extensions (Variation Across States – 1990)
Introduction
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.
Katz and Meyer (1990) use time-varying cross-state variation in UI program parameters to identify effects on labor supply.
Le Barbanchon et. al. (2024) draw upon the estimates from Katz and Meyer (1990) to compute the MVPF of additional UI benefits. The calculation builds upon the work of Schmieder and Von Wachter (2016) and Hendren and Sprung-Keyser (2020) but uses alternate values for the coefficient of relative risk aversion and consumption drop at benefit exhaustion.
MVPF = 0.7
Net Cost
The net cost is estimated as $1 of additional UI benefit plus the fiscal externalities from reduced search effort for a new job. Reduced search effort means people will be covered by UI for longer, leading to more total UI payouts. In addition, longer periods of non-employment lead to a fiscal externality through reduced income taxes.
The paper uses a calculation from Schmieder and Von Wachter (2016) to get a fiscal externality of $1.89 and a net government cost of $2.89.
Willingness to Pay
The willingness to pay for $1 of additional UI benefits is estimated as
to capture that individuals are willing to pay more than $1 to the extent to which they are risk averse. This is measured by the coefficient of relative risk aversion, gamma, and the extent to which they experience a consumption drop upon unemployment. The paper assumes a coefficient of relative risk aversion of 4 and a 25% estimate of consumption drop at job loss from Ganong and Noel (2019). This leads to a willingness to pay of $1 + 4*$0.25 = $2.00.
MVPF Summary
With a willingness to pay of $2.00 and a net government cost of $2.89, this leads to an MVPF of 0.69.
References
Hendren, Nathaniel and Ben Sprung-Keyser (2020). “A Unified Welfare Analysis of Government Policies.” The Quarterly Journal of Economics, 135(3): 1209–1318. DOI: https://doi.org/10.1093/qje/qjaa006
Katz, Lawrence F. and Bruce D. Meyer (1990). “The Impact of the Potential Duration of Unemployment Benefits on the Duration of Unemployment.” Journal of Public Economics, 41(1), 45-72. DOI: https://doi.org/10.1016/0047-2727(92)90056-L
Le Barbanchon, Thomas, Johannes Schmieder, and Andrea Weber (2024).“Chapter 6 – Job search, unemployment insurance, and active labor market policies.” Handbook of Labor Economics, 5: 435-580. DOI: https://doi.org/10.1016/bs.heslab.2024.11.006
Schmieder, Johannes F. and Till Von Wachter (2016). “The Effects of Unemployment Insurance Benefits: New Evidence and Interpretation.” Annual Review of Economics, 547-581. DOI: https://www.annualreviews.org/doi/abs/10.1146/annurev-economics-080614-115758
Policy Features
- Category
- Social Insurance
- Sub-Category
- Unemp. Ins.
- Beneficiary Type(s)
- Adults
- Average Age
- 33
- Average Income
- $38810
- Country of Implementation
- United States
- Year of Implementation
- 1980
- Empirical Method
- Difference in Differences
- Research Type
- Secondary
- Peer Reviewed
- Yes
- MVPF Publication Link
- doi.org/10.1016/bs.heslab.2024.11.006