Staff Reports
Unemployment Benefits and Unemployment in the Great Recession: The Role of Macro Effects
October 2013 Number 646
Revised: February 2015
JEL classification: E24, J63, J64, J65

Authors: Marcus Hagedorn, Fatih Karahan, Iourii Manovskii, and Kurt Mitman

We exploit a policy discontinuity at U.S. state borders to identify the labor market implications of unemployment benefit extensions. In contrast to the existing literature that focused on estimating the effects of benefit duration on job search decisions by the unemployed—the micro effect—we are guided by equilibrium labor market theory and focus on measuring the general equilibrium macro effect that operates through the response of job creation to benefit extensions. After developing a new methodology to measure the macro effect, we find that it is this effect that is very important quantitatively. In particular, benefit extensions raise equilibrium wages and lead to a sharp contraction in vacancy creation, lower employment, and a rise in unemployment.
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