•Expectations of future policies matter for the design of unemployment insurance.•Governments with commitment power front load insurance payments.•A simple rule based on the change in unemployment ...performs remarkably well.•A large transitory increase in UI was optimal in response to a COVID-type shock.
We investigate the optimal response of unemployment insurance to economic shocks, both with and without commitment. The optimal policy with commitment follows a modified Baily-Chetty formula that accounts for job search responses to future UI benefit changes. As a result, the optimal policy with commitment tends to front-load UI, unlike the optimal discretionary policy. In response to shocks intended to mimic those that induced the COVID-19 recession, we find that a large and transitory increase in UI is optimal; and that a policy rule contingent on the change in unemployment, rather than its level, is a good approximation to the optimal policy.
This paper investigates how a mandatory activation program in Denmark affects the job finding rate of unemployed workers. The activation program was introduced in an experimental setting where about ...half of the workers who became unemployed in the period from November 2005 to March 2006 were randomly assigned to the program while the other half was not. It appears that the activation program is very effective. The median unemployment duration of the control group is 14 weeks, while it is 11.5 weeks for the treatment group. The analysis shows that the job finding rate in the treatment group is 30% higher than in the control group. This result is mainly driven by the more intensive contacts between the unemployed and the public employment service.
•New method to project unemployment distribution.•Projections of long-term unemployment in COVID recession.•Very long-term unemployment projected to peak in early 2022 with 1.4 million individuals ...unemployed for more than 46 weeks.
We propose a three-step factor-flows simulation-based approach to forecast the duration distribution of unemployment. Step 1: estimate individual transition hazards across employment, temporary layoff, permanent layoff, quitter, entrant, and out of the labor force, with each hazard depending on an aggregate component as well as an individual’s labor force history. Step 2: relate the aggregate components to the overall unemployment rate using a factor model. Step 3: combine the individual duration dependence, factor structure, and an auxiliary forecast of the unemployment rate to simulate a panel of individual labor force histories. Applying our approach to the November Blue Chip forecast of the COVID-19 recession, we project that 750,000 workers laid off in April 2020 remain unemployed eight months later. Total long-term unemployment rises thereafter and eventually reaches 4.2 million individuals unemployed for more than 26 weeks and 1.4 million individuals unemployed for more than 46 weeks. Long-term unemployment rises even more in a more pessimistic recovery scenario, but remains below the level in the Great Recession due to a high amount of labor market churn.
This paper studies how changes in the two key parameters of unemployment insurance—the benefit replacement rate (RR) and the potential benefit duration (PBD)—affect the duration of unemployment. To ...identify such an effect we exploit a policy change introduced in 1989 by the Austrian government, which affected various unemployed workers differently: a first group experienced an increase in RR; a second group experienced an extension of PBD; a third group experienced both a higher RR and a longer PBD; and a fourth group experienced no change in the policy parameters. We find that unemployed workers react to the disincentives by an increase in unemployment duration, and our empirical results are consistent with the predictions of job search theory. We use our parameter estimates to split up the total costs to unemployment insurance funds into costs due to changes in the unemployment insurance system with unchanged behaviour and costs due to behavioural responses of unemployed workers. Our results indicate that costs due to behavioural responses are substantial.
We assess the performance of an index of Google job-search intensity as a leading indicator for predicting the monthly US unemployment rate. We carry out a deep out-of-sample forecasting comparison ...of models that adopt the Google Index, the more standard initial claims, or alternative indicators based on economic policy uncertainty and consumers’ and employers’ surveys. The Google-based models outperform most of the others, with their relative performances improving with the forecast horizon. Only models that use employers’ expectations on a longer sample do better at short horizons. Furthermore, quarterly predictions constructed using Google-based models provide forecasts that are more accurate than those from the Survey of Professional Forecasters, models based on labor force flows, or standard nonlinear models. Google-based models seem to predict particularly well at the turning point that takes place at the beginning of the Great Recession, while their relative predictive abilities stabilize afterwards.
We examine how deaths and emergency department (ED) visits related to use of opioid analgesics (opioids) and other drugs vary with macroeconomic conditions. As the county unemployment rate increases ...by one percentage point, the opioid death rate per 100,000 rises by 0.19 (3.6%) and the opioid overdose ED visit rate per 100,000 increases by 0.95 (7.0%). Macroeconomic shocks also increase the overall drug death rate, but this increase is driven by rising opioid deaths. Our findings hold when performing a state-level analysis, rather than county-level; are primarily driven by adverse events among whites; and are stable across time periods.
This paper presents evidence that firms conserve cash to manage employees' perceptions of the risk of becoming unemployed. Employing a matched sample design and using state level changes in ...unemployment insurance (UI) benefits to proxy for unemployment risk, we test the hypothesis that cash holdings and unemployment risk are positively related. We find an economically and statistically significant decrease in cash holdings after an increase in UI benefits (i.e., lower unemployment risk). Robust to alternative specifications, our findings also suggest that the positive relation between cash holdings and unemployment risk is more pronounced for firms that are more labor intensive, have a high layoff propensity, have a higher fraction of low-wage workers, and are in industries with a higher fraction of UI recipients. Overall, our results are consistent with the idea that cash holdings are affected by not only shareholders but also other stakeholders: namely employees.
•Firms conserve cash to manage employees’ perceptions of the risk of becoming unemployed.•Cash holdings decrease, following an increase in UI benefits (i.e., lower unemployment risk).•The relation between cash holdings and unemployment risk is more pronounced for firms that are more labor intensive.•The relation between cash holdings and unemployment risk is more pronounced for firms that have a high layoff propensity.•The relation between cash holdings and unemployment risk is more pronounced for firms that have more low-wage workers.•The relation between cash holdings and unemployment risk is more pronounced in industries with more UI recipients.•Our results are consistent with the idea that cash holdings are affected by employees.
Abstract
The job-finding rate of unemployment insurance (UI) recipients declines in the initial months of unemployment and then exhibits a spike at the benefit exhaustion point. A range of ...theoretical explanations have been proposed, but those are hard to disentangle using data on job finding alone. To better understand the underlying mechanisms, we conducted a large text-message-based survey of unemployed workers in Germany. We surveyed 6,349 UI recipients twice a week for four months about their job search effort. The panel structure allows us to observe how search effort evolves in individuals over the unemployment spell. We provide three key facts: (i) search effort is flat early on in the UI spell, (ii) search effort exhibits an increase up to UI exhaustion and a decrease thereafter, (iii) UI recipients do not appear to time job start dates to coincide with the UI exhaustion point. A standard search model with unobserved heterogeneity struggles to explain the second fact, and a model of storable offers is not consistent with the third fact. The patterns are well captured by a model of reference-dependent job search or by a model with duration dependence in search cost.
In order to combat the spread of the novel coronavirus, the Centers for Disease Control and Prevention (CDC) has developed a list of recommended preventative health behaviors for Americans to enact, ...including social distancing, frequent handwashing, and limiting nonessential trips from home. Drawing upon scarcity theory, the purpose of this study was to examine whether the economic stressors of perceived job insecurity and perceived financial insecurity are related to employee self-reports of enacting such behaviors. Moreover, we tested propositions regarding the impact of two state-level contextual variables that may moderate those relationships: the generosity of unemployment insurance benefits and extensiveness of statewide COVID-19-related restrictions. Using a multilevel data set of N = 745 currently employed U.S. workers nested within 43 states, we found that both job insecurity and financial insecurity were negatively related to the enactment of the CDC-recommended guidelines. However, the state-level variables acted as cross-level moderators, such that the negative relationship between job insecurity and compliance with the CDC guidelines was attenuated within states that have a more robust unemployment system. However, working in a state with more extensive COVID-19 restrictions seemed to primarily benefit more financially secure workers. When statewide policies were more restrictive, employees reporting more financial security were more likely to enact the CDC-recommended guidelines compared to their financially insecure counterparts. We discuss these findings in light of the continuing need to develop policies to address the public health crisis while also protecting employees facing economic stressors.
What is the most efficient way to respond to recessions in the labor market? To this question, policymakers on the two sides of the pond gave diametrically opposed answers during the COVID-19 crisis. ...In the United States, the focus was on insuring workers by increasing the generosity of unemployment insurance. In Europe, instead, policies were concentrated on saving jobs, with the expansion of short-time work programs to subsidize labor hoarding. Who got it right? In this article, we show that far from being substitutes, unemployment insurance and short-time work exhibit strong complementarities. They provide insurance to different types of workers and against different types of shocks. Short-time work can be effective at reducing socially costly layoffs against large temporary shocks, but it is less effective against more persistent shocks that require reallocation across firms and sectors. We conclude that short-time work is an important addition to the labor market policy-toolkit during recessions, to be used alongside unemployment insurance.
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