Unemployment insurance (UI) benefits typically are available for 26 weeks in the United States. In response to the Great Recession of 2007-2009, UI benefit availability was extended to the historically unprecedented level of 99 weeks. Some observers and analysts have argued that this policy measure was counterproductive and was in fact a major contributing factor to the severe, sustained dislocation in the U.S. labor market. In a new IZA discussion paper, Henry Farber and Robert Valletta find that such concerns have little basis in the facts. The effects of extended UI on the overall unemployment rate and labor market efficiency were quite limited.
Farber and Valletta apply direct statistical tests to data on unemployed individuals and find that extended UI accounts for less than half a percentage point of the 5.5 percentage-point increase in the unemployment rate. Moreover, these effects occurred primarily through prolonged labor force attachment rather than reduced job finding, suggesting that extended UI benefits do not substantially disrupt the hiring process. Using a common basis for comparison, the authors also find that the impact of extended UI on the behavior of job seekers was quite similar between the recent episode of extended benefits and an earlier episode associated with the milder recession of 2001. Despite their limited impact on overall unemployment, the results for both episodes indicate that extended UI can account for a substantial fraction of the recessionary increase in long-term unemployment, a nuance that is commonly overlooked in public debate over extended UI.