Unemployment dynamics and endogenous unemployment insurance extensions

Rujiwattanapong, W. Similan (2025) Unemployment dynamics and endogenous unemployment insurance extensions. European Economic Review, 178. ISSN 0014-2921

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Abstract

This paper investigates the general equilibrium effects of endogenous unemployment insurance (UI) extensions on the dynamics of unemployment and its duration in the US. Using a stochastic random-search-and-matching model with worker heterogeneity, I allow for the maximum UI duration to endogenously depend on unemployment, and for UI benefits to depend on worker characteristics replicating the US benefit system. The model is able to generate the observed incidence of (long-term) unemployment over the past six decades. Responses of job search to UI extensions (microeconomic effect of UI) are important for both long-term and total unemployment whilst responses of job separations (general equilibrium effect of UI) is important for total unemployment. Worker heterogeneity in terms of benefit levels is crucial for the unemployment duration dynamics via heterogeneous job finding rates. Disregarding the rational expectations of UI extensions may overestimate unemployment by almost 2 percentage points.

Item Type:	Article
Additional Information:	© 2025 The Author
Divisions:	Centre for Macroeconomics
Subjects:	H Social Sciences > HG Finance H Social Sciences > HB Economic Theory
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:	05 Aug 2025 15:06
Last Modified:	20 Aug 2025 23:13
URI:	http://eprints.lse.ac.uk/id/eprint/129058

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