Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/172908
Authors: 
Pei, Yun
Xie, Zoe
Year of Publication: 
2016
Series/Report no.: 
Working Paper 2016-11
Abstract: 
During recessions, the U.S. government substantially increases the duration of unemployment insurance (UI) benefits through multiple extensions. This paper seeks to understand the incentives driving these increases. Because of the trade-off between insurance and job search incentives, the classic time-inconsistency problem arises. This paper endogenizes a time-consistent UI policy in a stochastic equilibrium search model, where a government without commitment to future policies chooses the UI benefit level and expected duration each period. A longer benefit duration increases unemployed workers' consumption but reduces job search, leading to higher future unemployment. Quantitatively, the model rationalizes most of the variations in benefit duration during the Great Recession. We use the framework to evaluate the effects of the 2009-13 benefit extensions on unemployment and welfare.
Subjects: 
time-consistent policy
unemployment insurance
labor market
business cycle
JEL: 
E61
J64
J65
H21
Document Type: 
Working Paper

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