Unemployment Dynamics and Unemployment Insurance Extensions under Rational Expectations

W. Similan Rujiwattanapong

No 232, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: This paper investigates the impact of partially endogenous unemployment insurance (UI) extensions on the dynamics of unemployment and its duration structure in the US. Using a search and matching model with endogenous separations, variable job search intensity, on-the-job search and worker heterogeneity, I allow for the maximum UI duration to depend on unemployment and for UI benefits to depend on observable employment characteristics. The model can account for a large fraction of the observed rise in the long-term unemployment and realistic dynamics of the unemployment duration distribution during the Great Recession. Eliminating all UI extensions during the Great Recession could potentially lower the unemployment rate by 0.9-3.4 percentage points via both the responses of job search and vacancy posting incentives. Disregarding rational expectations about the timing of UI extensions implies an overestimation of unemployment by up to 2 percentage points. Once the heterogeneity in UI status and benefit level is accounted for, unobserved heterogeneity of workers does not account for much of the incidence of long-term unemployment.

Date: 2019
New Economics Papers: this item is included in nep-dge, nep-ias, nep-ore and nep-pbe
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:232

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