DP11060 The Impact of Unemployment Benefit Extensions on Employment: The 2014 Employment Miracle?

Author(s): Marcus Hagedorn, Iourii Manovskii, Kurt Mitman
Publication Date: January 2016
Keyword(s): aggregate employment, labor force, macroeconomic stabilization, search and matching, unemployment insurance
JEL(s): E24, E62, E65, J65
Programme Areas: Labour Economics, Monetary Economics and Fluctuations
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11060

We measure the aggregate effect of unemployment benefit duration on employment and the labor force. We exploit the variation induced by Congress' failure in December 2013 to reauthorize the unprecedented benefit extensions introduced during the Great Recession. Federal benefit extensions that ranged from 0 to 47 weeks across U.S. states were abruptly cut to zero. To achieve identification we use the fact that this policy change was exogenous to cross-sectional differences across U.S. states and we exploit a policy discontinuity at state borders. Our baseline estimates reveal that a 1% drop in benefit duration leads to a statistically significant increase of employment by 0.019 log points. In levels, 2.1 million individuals secured employment in 2014 due to the benefit cut. More than 1.1 million of these workers would not have participated in the labor market had benefit extensions been reauthorized.