UNEMPLOYMENT BENEFITS AND UNEMPLOYMENT IN THE GREAT RECESSION: THE - PowerPoint PPT Presentation

Introduction Empirical Methodology Empirical Results Macro effect Structural Model UNEMPLOYMENT BENEFITS AND UNEMPLOYMENT IN THE GREAT RECESSION: THE ROLE OF MACRO EFFECTS Hagedorn, Karahan, Manovskii, Mitman November 2013

Introduction Empirical Methodology Empirical Results Macro effect Structural Model Unemployment Benefit Duration

Introduction Empirical Methodology Empirical Results Macro effect Structural Model Beveridge Curve

Introduction Empirical Methodology Empirical Results Macro effect Structural Model What does this paper do? Identify and estimate the effects of unemployment insurance policies on unemployment. Trick: Policy discontinuity at U.S. state borders Measuring the general equilibrium macro effect Response of job creation to unemployment benefit extensions In contrast to: effects of benefit duration on job search and acceptance strategies of the unemployed — the micro effect

Introduction Empirical Methodology Empirical Results Macro effect Structural Model Model Mechanism Job finding rate = search intensity ∗ finding rate per unit of s Macro Mechanism Unemployment benefits Extension ⇓ An upward pressure on the equilibrium wage ⇓ Lowers the profits employers receive from filled jobs ⇓ Dedecline in vacancy creation (The decisions of firms to create jobs are forward looking) ⇓ Lowers aggregate job finding rate

Introduction Empirical Methodology Empirical Results Macro effect Structural Model Main Findings and Contribution Quantitatively measuring the macro effect Unemployment benefit extensions have a large effect on total unemployment: Changing unemployment from 5% to 10.5% after the Great Recession The "macro" elasticity is quantitatively large, much larger than the micro elasticity.

Introduction Empirical Methodology Empirical Results Macro effect Structural Model Literature Effects of unemployment benefit extensions Moffitt (1985), Katz and Meyer (1990), Meyer (1990), and Card and Levine (2000) Micro Effects Rothstein (2011): estimates the partial equilibrium effects of the unemployment benefit extensions on labor market outcomes during the Great Recession Macro Effect Mortensen and Pissarides (1994) Millard and Mortensen (1997) Hagedorn and Manovskii (2008)

Introduction Empirical Methodology Empirical Results Macro effect Structural Model Outline Empirical Methodology Empirical results Macro Effect Structural Model and numerical results Conclusion

Introduction Empirical Methodology Empirical Results Macro effect Structural Model Strategy Identification through state border county pairs Similar labor market structure Different state laws for Unemployment Benefits

Introduction Empirical Methodology Empirical Results Macro effect Structural Model Identification via Border Counties Firms’ period t profits from employing a worker = the difference between workers’ marginal product and the wage. The wage is affected by the generosity of unemployment benefits available to the worker. log π t = γ z log z t − γ b log b t z t is workers’ productivity and b t are benefits.

Introduction Empirical Methodology Empirical Results Macro effect Structural Model Value of a filled job J t = π t + β ( 1 − s t ) E t J t + 1 s t is the exogenous probability that the job ends

Introduction Empirical Methodology Empirical Results Macro effect Structural Model Free entry into vacancy posting q ( θ t ) J t = c Vacancy θ t : tightness = Unemployment q ( θ t ) is the probability to fill a vacancy and c is the the cost of maintaining a vacancy. Approximately: log θ t = ˜ κ log J t

Introduction Empirical Methodology Empirical Results Macro effect Structural Model log θ t = ˜ κ ( 1 − β ( 1 − s )) log π t + β ( 1 − s t ) log θ t + 1 + log η t Define ˜ x t = log x t − β ( 1 − s t ) log x t + 1 x t : log x t = λ x log θ t

Introduction Empirical Methodology Empirical Results Macro effect Structural Model Take differences across border counties ∆ ˜ x p , t = α ∆ b p , t + ∆ ε p , t (1) The effect of increasing benefit duration from ω 1 to ω 2 weeks for n time periods: α 1 − ( β ( 1 − s )) n ( log ω 2 − log ω 1 ) ˆ 1 − β ( 1 − s )

Introduction Empirical Methodology Empirical Results Macro effect Structural Model Interactive Effects ∆ ε p , t contains the expectation error and the permanent differences in ˜ x t across border counties caused by, e.g., permanent differences in tax policies across states they belong to. various shocks have affected the aggregate economy during the Great Recession. But the same aggregate shocks are likely to have a heterogeneous impact on different border county pairs Interactive-Effect Estimator x p , t = α ∆ b p , t + λ � ∆ ˜ p F t + v p , t Number of Factors: minimizing a criterion

Introduction Empirical Methodology Empirical Results Macro effect Structural Model

Introduction Empirical Methodology Empirical Results Macro effect Structural Model Tests Testing for Endogeneity: Discontinuous economic conditions at the state border Scrambled Border County Pairs Border Counties with Similar Industrial Composition Border Counties within the same CBSAs (degree of economic integration) Alternative Benefit Duration Measure The 2001 Recession

Introduction Empirical Methodology Empirical Results Macro effect Structural Model Controls Controlling for Other State-Level Policies Expansion of Food-Stamps Programs Variation in State Foreclosure Policies Effect of Stimulus Spending

Introduction Empirical Methodology Empirical Results Macro effect Structural Model

Introduction Empirical Methodology Empirical Results Macro effect Structural Model

Introduction Empirical Methodology Empirical Results Macro effect Structural Model Macro Effect Test for macro Effects

Introduction Empirical Methodology Empirical Results Macro effect Structural Model Numerical Results

Introduction Empirical Methodology Empirical Results Macro effect Structural Model Model Fitness

Introduction Empirical Methodology Empirical Results Macro effect Structural Model Conclusion Unemployment benefit extensions have a large effect on total unemployment. Estimates imply that unemployment benefit extensions can account for most of the persistently high unemployment after the Great Recession. The "macro" elasticity is quantitatively large, much larger than the micro elasticity.