Working Paper: NBER ID: w11760
Authors: Raj Chetty
Abstract: It is well known that unemployment benefits raise unemployment durations. This result has traditionally been interpreted as a substitution effect caused by a distortion in the price of leisure relative to consumption, leading to moral hazard. This paper questions this interpretation by showing that unemployment benefits can also affect durations through an income effect for agents with limited liquidity. The empirical relevance of liquidity constraints and income effects is evaluated in two ways. First, I divide households into groups that are likely to be constrained and unconstrained based on proxies such as asset holdings. I find that increases in unemployment benefits have small effects on durations in the unconstrained groups but large effects in the constrained groups. Second, I find that lump-sum severance payments granted at the time of job loss significantly increase durations among constrained households. These results suggest that unemployment benefits raise durations primarily because of an income effect induced by liquidity constraints rather than moral hazard from distorted incentives.
Keywords: Unemployment Benefits; Unemployment Durations; Moral Hazard; Liquidity Constraints
JEL Codes: H0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increases in unemployment benefits (J65) | Longer unemployment durations (J64) |
| Unemployment benefits (J65) | Longer unemployment durations for liquidity-constrained individuals (J64) |
| Lump-sum severance payments (J65) | Longer unemployment durations among constrained households (J64) |
| Liquidity constraints (E51) | Increased impact of unemployment benefits on durations (J65) |