A short review of recent evidence on the disincentive effects of unemployment insurance and new evidence from New York state

Abstract

This paper examines two sets of evidence on the effects of unemployment insurance (UI). First, we discuss two recent lines of research on the effects of UI, one of which argues that UI is more welfare enhancing than previously thought, and a second that suggests that its distortions are often larger than previously argued. We point out limitations in each research program, but conclude that both significantly advance our knowledge. Second, we summarize the evidence on the effect of UI on claim duration from a 36 percent increase in the maximum weekly benefit in New York State. This policy change sharply increased benefits for a large group of claimants, while leaving them unchanged for a large share of claimants who provide a natural comparison group. The New York benefit increase has the special features that it was unexpected and applied to in-progress spells. These features allow the effects on duration to be more convincingly separated from effects on incidence. The results show a fall in the hazard of leaving UI that coincides with the increase in benefits. The estimated unemployment duration elasticities with respect to the UI benefit range from 0.1-0.2, towards the low end of past estimates. We do not find larger effects for those who are more likely to be liquidity constrained. We also examine the extent of bias in standard methods that identify duration effects through nonlinearities in the benefit schedule, finding mixed results.