Disincentive Effects of Unemployment Insurance Benefits

Abstract

Unemployment insurance (UI) acts both as a disincentive for labor supply and as a demand stimulus which may explain why empirical studies often find limited effects of UI on employment. This paper provides independent estimates of the disincentive effects arising from the largest expansion of UI in U.S. history, the pandemic unemployment benefits. Using high-frequency data on small restaurants and retailers from Homebase, we control for local demand effects by comparing neighboring businesses that largely share the positive impact of UI stimulus. We find that employment in low-wage businesses recovered more slowly than employment in high-wage businesses in labor markets with larger differences in the relative generosity of pandemic UI benefits. According to a labor search model that replicates the estimated employment differences between low-and high-wage businesses, the disincentive effects from the pandemic UI programs held back the aggregate employment recovery by 4.7 percentage points between April and December 2020.

The Dual U.S. Labor Market Uncovered

“…A growing recent literature has emphasized the importance of different subcategories of persons within the three labor market states for individual and aggregate outcomes. These include heterogeneity among the unemployed that accounts for the duration distribution of unemployment (van den Berg and van Ours, 1996;Hornstein, 2012;Ahn and Hamilton, 2020a; The Dual U.S. Labor Market Uncovered Ahn, Hobijn, and Şahin Kroft et al, 2016;Mueller and Spinnewijn, 2023), heterogeneity in the type of jobs for the employed to account for the tenure distribution (Hall, 1982;Hyatt and Spletzer, 2016) as well as worker turnover (Pries, 2004;Pries and Rogerson, 2021), and heterogeneity among different categories of non-participants and unemployed to account for fluctuations in matching efficiency (Hall and Schulhofer-Wohl, 2018;Sedláček, 2016;Abraham et al, 2020). All these studies have the common implication that a more accurate description of individual-level labor market histories as well as macro-level labor market dynamics requires the identification and measurement of broad subcategories of the three coarse labor market states.…”