DP16125 Assessing the (De)Stabilizing Effects of Unemployment Benefit Extensions

Author(s): Alexey Gorn, Antonella Trigari
Publication Date: May 2021
Keyword(s): cyclical benefit extensions, Heterogeneous Agents, nominal rigidities, opportunity cost of employment, precautionary motives, redistribution, search frictions, Unemployment insurance
JEL(s): E24, E32, E52, J63, J64, J65
Programme Areas: Labour Economics, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16125

We study the stabilizing role of unemployment benefit extensions. We develop a tractable quantitative model with heterogeneous agents, search frictions, and nominal rigidities. The model allows for both a stabilizing aggregate demand channel and a destabilizing labor market channel of unemployment insurance. We characterize analytically the workings of each channel. Stabilizing aggregate demand effects marginally prevail in the U.S. economy and the unprecedented benefit extensions introduced during the Great Recession played a limited role for unemployment dynamics. Instead, unemployment from the model tracks actual unemployment with a combination of labor market shocks and a shock to the consumers' borrowing capacity.