Job Market Paper

Long-term Unemployment Dynamics and Unemployment Insurance Extensions

Abstract

This paper investigates the impact of unemployment insurance (UI) extensions on the incidence of long-term unemployment and on the unemployment duration in the US. Using a search and matching model with endogenous separations, variable search intensity and on-the-job-search, I allow for the maximum UI duration to depend on unemployment rate and for UI benefits to depend on match quality during employment. The model can generate all the observed rise in the long-term unemployment and realistic dynamics of the unemployment duration distribution during the Great Recession. It, however, overestimates the long-term unemployment in some recessions and does not generate enough persistence. I show that reducing the maximum UI duration by 22 weeks lowers the unemployment rate by at most 1 percentage point during the Great Recession but it can reduce the long-term unemployment rate by up to 1.6 percentage point and the average unemployment duration by up to 14 weeks.