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Mathematics and Financial Economics

01.02.2024

Countercyclical unemployment benefits: a general equilibrium analysis of transition dynamics

verfasst von: Erhan Bayraktar, Indrajit Mitra, Jingjie Zhang

Erschienen in: Mathematics and Financial Economics

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Abstract

We analyze the general equilibrium effects of countercyclical unemployment benefit policies. Our heterogenous-agent model features costly job search with imperfect insurance of unemployment risk and individual savings. Our model predicts: (1) the additional unemployment under a countercyclical policy relative to that under an acyclical policy to be a superlinear function of the aggregate shock?s size, (2) a higher unemployment rate sensitivity to UI policy changes when individual savings are relatively low. Our estimates of the effects of UI policy changes are based on transition dynamics following a large, unanticipated increase in the unemployment rate.

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Fußnoten
1
The CARES Act of 2020, for instance, added $600 per week to the pre-existing level of UI benefits (the maximum pre-existing benefits varied from $200 per week to $600 per week across states) and extended the duration of benefits, initially to a maximum of 39 weeks, and later extending this to 53 weeks (the pre-existing duration for most states was 26 weeks). Similarly, UI benefits following the Great Recession were extended by 99 weeks from the usual 26 weeks.
 
2
This intuition holds over a short, finite period following the aggregate shock. The excess unemployment rate approaches zero as \(t\rightarrow \infty \) when the equilibria under both policies revert back to the same steady-state.
 
3
[11] analyzes implications of UI policy over the business cycle in a model featuring individual savings but do not consider the disincentives to job search from higher UI payments since the model does not feature costly job search.
 
4
Our choice of this search cost is standard in the literature (see e.g., [2], and [21]). Recently [22, 23], and [24] provide direct evidence that higher UI benefits lower job search activity, thus providing a justification for costly job search.
 
5
Instead of modeling the dependence of UI payments on recent earnings through accumulated savings, an alternate choice would be to make UI payments depend explicitly on the agent’s past year’s labor income. The latter modeling choice would require us to introduce cross-sectional heterogeneity in wages in order to capture differences among high and low income agents in their incentives to search for a job. Because heterogeneous wages would significantly deviate from standard general equilibrium models in the UI literature, we leave its analysis for future research.
 
6
For instance, Ganong et al. [26] report that UI benefits in Nevada reach their maximum for individuals with weekly income above $902. This is close to the mean income of $886 per week in that state. Both of these are values for 2019.
 
7
In our model, the cost of being unemployed is inversely related to the agent’s savings k because a higher capital stock provides: (i) a higher capital rental income and (ii) a larger buffer to weather an unemployment spell for a longer period of time.
 
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Metadaten
Titel
Countercyclical unemployment benefits: a general equilibrium analysis of transition dynamics
verfasst von
Erhan Bayraktar
Indrajit Mitra
Jingjie Zhang
Publikationsdatum
01.02.2024
Verlag
Springer Berlin Heidelberg
Erschienen in
Mathematics and Financial Economics
Print ISSN: 1862-9679
Elektronische ISSN: 1862-9660
DOI
https://doi.org/10.1007/s11579-023-00351-x