Why Are Unemployment Insurance Claims So Low?

Christopher O'Leary, Kenneth J. Kline, Thomas A. Stengle and Stephen A. Wandner
Additional contact information
Kenneth J. Kline: W.E. Upjohn Institute for Employment Research
Thomas A. Stengle: Retired
Stephen A. Wandner: National Academy of Social Insurance

No 23-383, Upjohn Working Papers from W.E. Upjohn Institute for Employment Research

Abstract: In this paper, we examine the reasons why unemployment insurance (UI) claims have declined so dramatically over the past three decades. The fall in the UI claims rate is concerning because it suggests a reduced countercyclical effectiveness of the UI program. Additionally, weekly initial UI claims are regarded as an important leading indicator of aggregate economic activity, so their meaning has changed. We use a Oaxaca (1973) decomposition approach to identify the main factors for the decline in claims. The procedure suggests what the level of claims would have been later in the period, had values of variables or parameters of the system been at levels observed earlier in the period. Our analysis of state-year data over the past three decades suggests that the decline in UI claims stems from changes in the industrial and occupational mix of employment interacting with changes in UI program features set by individual states. Employment declines in manufacturing and increases in the health-care and education workforce, along with lower potential UI duration and lower wage replacement rates, contribute to the decline in claims. This decline could be offset by federal rules for states to improve benefit access, replacement rates, and durations. Such changes could improve the relevance of UI to the labor market and help restore UI as meaningful social insurance against job loss and as an automatic stabilizer of the macroeconomy.

Keywords: unemployment insurance (UI); applications for benefits; first claims; wage replacement rate; potential duration of benefits; industrial mix of employment; occupational mix of employment (search for similar items in EconPapers)
JEL-codes: H76 J65 J68 (search for similar items in EconPapers)
Date: 2023-04
New Economics Papers: this item is included in nep-hea, nep-inv and nep-pbe
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