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

• utcomes 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 πt = γz log zt − γb log bt zt is workers’ productivity and bt are benefits.

Introduction Empirical Methodology Empirical Results Macro effect Structural Model

Value of a filled job Jt = πt + β (1 − st) EtJt+1 st is the exogenous probability that the job ends

Introduction Empirical Methodology Empirical Results Macro effect Structural Model

Free entry into vacancy posting q (θt) Jt = c θt : tightness =

Vacancy Unemploymentq(θt) is the probability to fill a

vacancy and c is the the cost of maintaining a vacancy. Approximately: log θt = ˜ κ log Jt

Introduction Empirical Methodology Empirical Results Macro effect Structural Model

log θt = ˜ κ (1 − β (1 − s)) log πt + β (1 − st) log θt+1 + log ηt Define ˜ xt = log xt − β (1 − st) log xt+1 xt : log xt = λx log θt

Introduction Empirical Methodology Empirical Results Macro effect Structural Model

Take differences across border counties ∆˜ xp,t = α∆bp,t + ∆εp,t (1) The effect of increasing benefit duration from ω1 to ω2 weeks for n time periods: ˆ α1 − (β (1 − s))n 1 − β (1 − s) (log ω2 − log ω1)

Introduction Empirical Methodology Empirical Results Macro effect Structural Model

Interactive Effects

∆εp,t contains the expectation error and the permanent differences in ˜ xt 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 ∆˜ xp,t = α∆bp,t + λ

pFt + vp,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.