Working Paper: CEPR ID: DP16125
Authors: Antonella Trigari; Alexey Gorn
Abstract: We study the stabilizing role of benefit extensions. We develop a tractable quantitative model with heterogeneous agents, search frictions, and nominal rigidities. The model allows for a stabilizing aggregate demand channel and a destabilizing labor market channel. We characterize each channel analytically and find that aggregate demand effects quantitatively prevail in the US. When feeding-in estimated shocks, the model tracks unemployment in the two most recent downturns. We find that extensions lowered unemployment by a maximum of 0.35 pp in the Great Recession, while the joint stabilizing effect of extensions and benefit compensation peaked at 1.08 pp in the pandemic.
Keywords: Unemployment Insurance; Cyclical Benefit Extensions; Heterogeneous Agents; Redistribution; Precautionary Motives; Opportunity Cost of Employment; Nominal Rigidities; Search Frictions
JEL Codes: E24; E32; E52; J63; J64; J65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Unemployment benefit extensions (J65) | Unemployment rates (J64) |
| Increased consumption among liquidity-constrained unemployed workers (D12) | Labor demand (J23) |
| Labor demand (J23) | Job creation (J23) |
| Unemployment benefit extensions + Benefit compensation (J65) | Unemployment rates (J64) |
| Without extensions (Y60) | Unemployment rates (J64) |
| Unemployment benefit extensions (J65) | Increased consumption among liquidity-constrained unemployed workers (D12) |
| Unemployment benefit extensions (J65) | Labor market channel destabilization (F66) |