Extending the duration of unemployment benefits accounts for only a fraction of the increase in the unemployment rate during the recession

To deal with the high level of unemployment during the Great Recession, lawmakers extended the duration of unemployment benefits. One recent study found that the extensions served to increase unemployment significantly by putting upward pressure on wages, leading to less job creation by firms. Federal Reserve Bank of Cleveland researchers Pedro Amaral and Jessica Ice replicated this study with an updated and longer sample, and found a much smaller impact.

Some observers have criticized the extension of unemployment insurance (UI) benefits for incentivizing workers to stay unemployed and for keeping the unemployment rate higher than it would have been otherwise. A recent study by Hagedorn, Karahan, Manovskii, and Mitman (2013), finds that benefits extension has had a substantial impact on unemployment. Their study differs from others in that it takes into account the impact of extensions on labor demand, as well as labor supply. HKMM note that, as the generosity of benefits increases, the fact that unemployment becomes relatively more attractive puts pressure on wages to increase. As a result, fewer jobs are created, and unemployment goes up, everything else being the same. HKMM find that this effect can account for most of the increase in the unemployment rate during the recession and recovery.

Using the same methodology as HKMM and a longer sample, Amaral and Ice find that had the duration of UI benefits not been extended, the unemployment rate would have increased roughly one percentage point less from June 2008 to its peak in October 2009. While significant, the researchers say this labor demand channel can account for only one-fourth of the actual increase in the unemployment rate.

Amaral and Ice note that the channels through which UI benefits policy may affect labor market outcomes and economic growth are numerous. While more generous UI benefits may lead to higher unemployment by reducing job creation by firms, the benefits also may stimulate demand by putting money in the hands of the unemployed, who are potentially less likely to save those dollars than the average taxpayer. Moreover, a more generous UI policy can have a liquidity effect that helps subsidize the job searches of unemployed workers who are more likely to be financially constrained, potentially leading to better, more productive job matches. A sensible benefits policy needs to take all of these dimensions into account, say the researchers.

Read Reassessing the Effects of Extending Unemployment Insurance Benefits

Drop in Pennsylvania’s unemployment rate due largely to decline in labor force, says Cleveland Fed researcher

Pennsylvania’s unemployment rate fell rather sharply in 2014, and stood at 5.7 percent in September, below the US average of 5.9 percent. But the drop is due largely to a decline in the state’s labor force, says Guhan Venkatu, vice president and senior regional officer at the Pittsburgh Branch of the Federal Reserve Bank of Cleveland.

According to Venkatu, Pennsylvania’s labor force fell by 76,791 workers, or 1.2 percent, from December 2013 to September 2014. Holding the labor force constant, Venkatu says Pennsylvania’s unemployment rate would be 6.8 percent.

Venkatu says the state’s employment growth in 2014 is on pace to slightly exceed its employment growth in 2012 and 2013, but he notes that at 0.6 percent, this pace is considerably weaker than the 2.0 percent pace of employment growth for the US as a whole.

Examining Pennsylvania’s two major metro areas (MSAs), Venkatu says that as of September, the Pittsburgh MSA had about 17,000 more jobs than it did in December 2007, while the Philadelphia MSA (which includes areas outside of PA) had about 47,300 fewer jobs. Pittsburgh ranks 41st among the 100 largest US metro areas in employment gains since the onset of the recession, while Philadelphia ranks 76th.

Read Employment Trends in Pennsylvania

Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.

The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.

Media contact

Doug Campbell, doug.campbell@clev.frb.org, 513.455.4479