UI Benefit Generosity and Labor Supply from 2002-2020: Evidence from California UI Records

NBER WORKING PAPER: UI Benefit Generosity and Labor Supply from 2002-2020 (forthcoming in the Journal of Labor Economics)
Prepublication version PDF

While a substantial body of research has previously demonstrated that more generous unemployment insurance (UI) benefits lead to people claiming UI benefits for longer periods of time, less is known about how the effect of UI benefits on labor supply varies over the business cycle or how it changed during the COVID-19 Pandemic.

Typically, policymakers consider providing more generous unemployment benefits during recessions. Prior studies have analyzed the effects of increases in weekly benefit amounts on the length of time claimants remain unemployed, but policymakers may also want to know how this response to benefit generosity varies over the business cycle.

Our research strategy allows us to isolate this response for each year from 2002 to 2020. We then assess how the effect differs in different economic conditions – including the Great Recession, the following economic expansion, and the COVID-19 pandemic.

To obtain an estimate of the effect of increased UI benefits among UI claimants for any given year, we compare individuals starting a new period of claiming UI benefits just above and just below the maximum UI benefit, which in CA is $450. Because UI replaces 50% of prior earnings up to this maximum payment, the benefit schedule has an abrupt change in slope—or “kink”— as a function of prior earnings, at which point the incremental replacement rate changes from 50% to 0%. Intuitively, because claimants on either side of the kink point are likely to be similar, comparisons of claimants above versus below the kink point allow us to identify the causal effect of a change in weekly UI benefit generosity.

Our research design yields three key findings about the effect of weekly UI benefit generosity on job search:

1) The effect of UI benefit generosity on claimants’ behavior at any given point in time while they are claiming UI benefits does not vary with the business cycle. When weekly benefit amounts are higher, claimants are less likely to choose to stop receiving the benefits at any point in their unemployment spell, but this effect does not vary with labor market conditions.

2) In contrast, the effect of UI benefit generosity on total unemployment duration was higher during the Great Recession than in the surrounding years, when unemployment rates were lower and benefit extension programs were not in effect. The increase in the responsiveness to weekly UI benefit generosity during the Great Recession was driven by increases in potential benefit duration (UI extension programs), which mechanically increase total duration elasticities to benefit levels through what we refer to as a “coverage effect.”

3) During the pandemic, the amount of weekly UI benefits mattered substantially less to the behavior of claimants than at any point in the previous 20 years. This decline in the response to UI benefits during the pandemic was not driven by changes in the composition of UI claimants, but instead appears to have been a result of other unique factors of the pandemic environment, including increases in liquidity and risks associated with returning to work, among other things.

These findings can help inform policies related to unemployment insurance benefits in future economic downturns, including questions around benefit levels and extensions, and the role that supplemental federal programs played during the COVID-19 Pandemic.

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