Why Are Unemployment Insurance Claims So Low?

Abstract

The authors investigate reasons unemployment insurance (UI) claims have declined dramatically over the past 3 decades. The fall is concerning because it suggests a reduced countercyclical effectiveness of the UI program. Additionally, weekly initial UI claims are an important leading indicator of aggregate economic activity, so their meaning has changed. The authors identify the main factors that changed with the decline in claims. Their procedure suggests what the level of claims would have been later in the period, had values of variables or parameters of the system been at levels observed earlier in the period. The analysis of state-year data suggests that the decline in UI claims stems largely from changes in the industrial and occupational mix of employment interacting with changes in UI program features set by individual states. This decline could be offset by federal rules for states to improve benefit access, replacement rates, and potential UI durations.