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Unemployment insurance and labour productivity over the business cycle

Rujiwattanapong, W. Similan (2022) Unemployment insurance and labour productivity over the business cycle. Review of Economic Dynamics, 46. 196 - 223. ISSN 1094-2025

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Identification Number: 10.1016/j.red.2021.09.002

Abstract

This paper quantifies the effects of the increasing maximum unemployment insurance (UI) duration during recessions on the drop in the correlation between output and labour productivity in the U.S. since the early 1980s – the so-called productivity puzzle. Using a general equilibrium search and matching model with stochastic UI duration, heterogeneous match quality, variable search intensity and on-the-job search, I demonstrate that the model can explain over 40 percent of the drop in this correlation (28 percent when the Great Moderation is taken into account). More generous UI extensions during recent recessions cause workers to be more selective with job offers and lower job search effort. The former channel raises the overall productivity in bad times. The latter prolongs UI extensions since in the U.S. they are triggered by high unemployment.

Item Type: Article
Official URL: https://www.sciencedirect.com/journal/review-of-ec...
Additional Information: © 2021 The Author
Divisions: Centre for Macroeconomics
Subjects: H Social Sciences > HD Industries. Land use. Labor
H Social Sciences > HC Economic History and Conditions
JEL classification: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E24 - Macroeconomics: Employment; Unemployment; Wages; Intergenerational Income Distribution (includes wage indexation)
E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
J - Labor and Demographic Economics > J2 - Time Allocation, Work Behavior, and Employment Determination and Creation; Human Capital; Retirement > J24 - Human Capital; Skills; Occupational Choice; Labor Productivity
J - Labor and Demographic Economics > J6 - Mobility, Unemployment, and Vacancies > J64 - Unemployment: Models, Duration, Incidence, and Job Search
J - Labor and Demographic Economics > J6 - Mobility, Unemployment, and Vacancies > J65 - Unemployment Insurance; Severance Pay; Plant Closings
Date Deposited: 10 Mar 2022 17:51
Last Modified: 20 Sep 2022 09:21
URI: http://eprints.lse.ac.uk/id/eprint/114314

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