Working Paper: NBER ID: w25574
Authors: David S. Lee; Pauline Leung; Christopher J. O'Leary; Zhuan Pei; Simon Quach
Abstract: Central to the welfare analysis of income transfer programs is the deadweight loss associated with possible reforms. To aid analytical tractability, its measurement typically requires specifying a simplified model of behavior. We employ a complementary “decomposition” approach that compares the behavioral and mechanical components of a policy’s total impact on the government budget to study the deadweight loss of two unemployment insurance policies. Experimental and quasi-experimental estimates using state administrative data show that increasing the weekly benefit is more efficient (with a fiscal externality of 53 cents per dollar of mechanical transferred income) than reducing the program’s implicit earnings tax.
Keywords: Unemployment Insurance; Fiscal Externality; Deadweight Loss
JEL Codes: C14; C20; C31; H2; H23; J64; J65; J68
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Traditional sufficient statistics approach (C29) | Overestimate of fiscal externality (D62) |
| Increasing the weekly benefit amount (J65) | Fiscal externality of 53 cents per dollar of mechanical transferred income (H29) |
| Reducing the implicit earnings tax (H31) | Fiscal externality of 138 cents per dollar (H29) |
| Behavioral response to an increase in benefits (D91) | Higher total payments to claimants (J33) |
| Behavioral response to an increase in benefits (D91) | No significant effect on earnings (J31) |
| Behavioral response (D91) | Fiscal externality related to benefit payments (H29) |
| Behavioral response (D91) | Fiscal externality related to tax receipts (H29) |