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Extension of unemployment benefits and changes in job search margins

Published online by Cambridge University Press:  27 June 2022

Omid Mousavi
Omid Mousavi*
Affiliation:
Department of Economics, University of Melbourne, 111 Barry Street, Carlton, VIC 3010, Australia
*
Email: omidmousavi79@gmail.com
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Abstract

Unemployment insurance benefits are often extended during recessions. Existing research shows that this policy increases the unemployment rate and the duration of unemployment. But less is known about why these changes occur. I construct a job search model with an endogenous participation decision to quantify the contributions of (i) search effort, (ii) job selectivity, and (iii) labor market participation, to changes in unemployment outcomes. In a model calibrated to the US economy, I show that the increased participation accounts for a large fraction of the increase in the unemployment rate following a permanent extension of benefits. This finding indicates the importance of changes in the participation decision of workers facing extended benefits for the unemployment rate—a mechanism that is understudied and frequently overlooked in the quantitative labor market research exploring the impact of UI policies.

Keywords

Unemployment insurancelabor marketjob searchlabor market participation
Type
Articles
Information
Macroeconomic Dynamics , Volume 27 , Issue 5 , July 2023 , pp. 1424 - 1454
Copyright
© The Author(s), 2022. Published by Cambridge University Press

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Footnotes

*

The author would like to thank Lawrence Uren, Chris Edmond, May Li, Yusuf Mercan, John P Haisken-DeNew, Bruce Preston, Chris Skeels, the seminar participants at the University of Melbourne, the University of New South Wales, as well as the associate editor, and the two anonymous referees for helpful comments and discussions. All errors are mine.

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