Supply and Demand Effects of Unemployment Insurance Benefit Extensions: Evidence from U.S. Counties

Klaus-Peter Hellwig

No 2021/070, IMF Working Papers from International Monetary Fund

Abstract: I use three decades of county-level data to estimate the effects of federal unemployment benefit extensions on economic activity. To overcome the reverse causality coming from the fact that benefit extensions are a function of state unemployment rates, I only use the within-state variation in outcomes to identify treatment effects. Identification rests on a differences-in-differences approach which exploits heterogeneity in county exposure to policy changes. To distinguish demand and supply-side channels, I estimate the model separately for tradable and non-tradable sectors. Finally I use benefit extensions as an instrument to estimate local fiscal multipliers of unemployment benefit transfers. I find (i) that the overall impact of benefit extensions on activity is positive, pointing to strong demand effects; (ii) that, even in tradable sectors, there are no negative supply-side effects from work disincentives; and (iii) a fiscal multiplier estimate of 1.92, similar to estimates in the literature for other types of spending.

Keywords: Automatic stabilizers; Fiscal multiplier; Labor markets; benefit extension; State UI scheme; benefit duration; emergency unemployment compensation program; benefit transfer; state UI fund; Unemployment; Employment; Unemployment rate (search for similar items in EconPapers)
Pages: 35
Date: 2021-03-12
New Economics Papers: this item is included in nep-ias, nep-mac and nep-pke
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