Is there a long-run relationship between the unemployment insurance and the labor force participation rate in the USA? A nonlinear analysis

Abstract

Purpose: This paper explores the evidence of a long-run co-movement between aggregate unemployment insurance spending and the labor force participation rate in the USA. The unemployment insurance (UI) program tends to expand during an economic downturn and contract during an expansion. UI may incentivize unemployment and may also facilitate better matching in the labor market. Statistical evidence of the presence of a co-movement will thus shed new light on their dynamics. Design/methodology/approach: This research applies time-series econometric approach using monthly data from 1959:1 to 2020:3 to test threshold cointegration and estimate a threshold vector error-correction (TVEC) model. The estimates from the TVEC model investigating the nature of short-run dynamics. Findings: The Enders and Siklos (2001) test find evidence of threshold cointegration between the two indicating the presence of long-run co-movement. The estimates from the TVEC model investigating the nature of short-run dynamics find evidence that the growth in aggregate UI spending and the growth in labor force participation rate adjust simultaneously to maintain the long-run co-movement above the threshold in the short run. The author also observes the same short-run dynamics for the growth in aggregate UI spending and the growth in the labor force participation rate for females. Research limitations/implications: This model is bi-variate by construction and does not address causality. Practical implications: The author argues that the UI program positively impacts the female labor market outcomes, for example, better matching. This finding may explain the upward trend in the labor force participation rate for females in the USA. Social implications: The research findings may justify the transfer programs for minority and immigrants. Originality/value: This is first research that analyzes the UI programs impact on the labor force participation using a macroeconometric approach. To the best of the author's knowledge, this is the first study in this genre.