The impacts of unemployment benefits on job match quality and labour market functioning
The COVID-19-induced recession has revived a long-term debate between competing narratives about the purposes, efficacy, and efficiency of unemployment insurance benefits (UI). In fact, recent Vox columns have studied the economic importance of UI benefits (Nekoei and Weber 2015, Marinescu 2016, Boone et al. 2017, and Landais et al. 2018).
A narrative we hear from too many US policymakers portrays the enhancement of unemployment benefits in a recession as a fiscally painful step, taken only reluctantly and for as short a time as possible, to support unemployed workers until they take the first job they can find. This narrative is largely based on the notion that workers will generally choose benefits over work and will reduce job search efforts while they receive benefits.
While this is the prevailing view on UI, it overlooks the benefits that unemployment insurance can provide not only to workers and their families but also to firms and the larger economy. Our recent research (Farooq et al. 2020) provides new evidence that has not been available previously in the US for a competing narrative. Our evidence shows that by providing more time for job searches, extended unemployment benefits significantly improve job matching. Matching workers with the most suitable jobs – given their education, talents, and experience – benefits workers, because they earn higher wages and have greater job satisfaction. It also aids firms, because it makes them more efficient, and it supports the overall economy because it improves productivity.
Both interpretations on the impacts of unemployment benefits, either in terms of reducing job search or improving matching, suggest longer durations of unemployment spells for job seekers. There is indeed considerable research suggesting a positive association, of varying degrees, between the duration of unemployment benefits and the duration of unemployment (Moffitt 1985, Meyer 1990, Card and Levine 2000).
But the second interpretation of the relationship between UI benefits and unemployment spells is that extensions in UI benefits allow workers to search for better jobs, thus correcting distortions in the labour market and leading to better employment and higher productivity. Only a few papers using European data have measured the effect of benefit duration on overall earnings. They have mixed results, with only Nekoei and Weber (2017) finding positive and statistically significant estimates of the impact of UI on re-employment wages. They attribute this result to increased job searches by the unemployed.
Exploring the impacts of UI extensions
The key contribution of our work is to examine the direct effect of benefit duration on actual measures of job match quality using data from the US.
We exploit variation in the duration of UI benefits in the US during the past two recessions, when different states were subject to longer UI benefit claims due to the introduction of federal UI extensions. While most states in the US set a maximum duration of 26 weeks, during periods of high unemployment – recessions and their aftermath – the federal Extended Benefits (EB) programme kicks in for states reaching certain levels of unemployment, and Congress frequently approves further emergency extensions through Emergency Unemployment Compensation (EUC). Figure 1 illustrates the wide variation in benefit durations for the 50 states (plus the District of Columbia) for the period covered by our research—between 2000 and 2013.
Figure 1 UI benefits variations within states
We use data from the US Census Bureau’s Longitudinal Employer Household Dynamics (LEHD) database and the Current Population Survey (CPS) to examine the impact of the UI extensions on match quality by constructing three measures. First, we examine the impact of UI on the similarity in worker and firm ranking, i.e. how close a worker and a firm are in terms of the overall ranking of wages received and paid among all workers and firms. Second, we examine the impact of UI on residual wages after taking out the effects of worker abilities and firm effects. Finally, we examine the impact of UI on the difference between a worker’s educational attainment and the educational requirement of the job.
Overall effects from UI are positive, but greater for the most disadvantaged
We found effects of UI on overall wages and on the three different measures of match quality. First, we found that workers who had access to UI benefits for longer were able to find higher-paying jobs. For example, as shown in Figure 2, following the Great Recession, the extension of maximum benefit duration from 26 weeks to 79 weeks in 2009 increased workers’ re-employment wages by 2.6% on average. Second, we find that an increase in UI benefits by 53 weeks increases the dissimilarity index and the wage residual by one percentage point. We also find that prolonging UI durations reduces over-education, as it decreases the difference between the educational level of the worker and the educational requirements of the job. We found that the 2009 extension to a maximum 79 weeks of benefits increased the likelihood of a worker finding a new job requiring more education than their previous job by 11.7 percentage points.
Importantly, the effects are greater during the Great Recession than during the recession of the early 2000s. This is consistent with the results by Kroft and Notowidigdo (2016) who find that the reduced incentives to search when UI is more generous are mitigated during recessions, and so the benefits of better matching may dominate the reduced job search efforts during a deep recession like the Great Recession.
Figure 2 Predicted percentage increase in wages by UI duration
Importantly, the benefits of extended payments were greater for women as well as for minority and less educated workers. These are groups that are more likely to have inadequate resources, and lower ability to borrow, in order to withstand a long bout of unemployment. Thus, liquidity-constrained workers benefit most from UI suggesting that more generous UI benefits improve matches between workers and employers because it allows workers to search longer for a better match.
Conclusions and policy implications
Our evidence suggests that more generous unemployment insurance benefits improve the functioning of the labour market by improving job matching, the connection of ideally suited workers and employers. Thus, both workers and employers benefit from more generous UI as improved matching increases wages for workers and productivity for firms. In addition, the benefit to the job market does not stop with those workers and the firms that hire them. By not having to take a job for which she was overqualified, which paid less, or which did not meet her needs in other ways, that worker left that job available to an individual for whom it was a better match, and that worker, in taking that job, left open a job more suitable for somebody else, and so on. This chain reaction induces large benefits for far more workers and employers and the overall labour market.
In the coronavirus recession, the first extension of UI benefits, enacted in March, extended the maximum benefit duration from the 26 weeks provided by most states to 39 weeks. The legislation enacted at the end of 2020 provided a second extension to a maximum of 50 weeks. These extensions are crucial in helping workers sustain their basic consumption levels and stay out of poverty. Our work also suggests that these extensions may well be crucial in ensuring workers land good jobs when the economy recovers again.
Moreover, because high unemployment could last well into 2021 and workers will experience loss of skills, further extensions and supplemental benefits might be necessary to help workers weather this storm and end up in appropriate jobs after the recession. Our research suggests that as long as unemployment remains high, extended benefits can significantly improve the wellbeing of workers and their families, as well as firms and the economy at large. The labour market right now is severely damaged. Giving ideally suited workers and firms sufficient time to find each other can be part of the healing.
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Farooq, A, A Kugler and U Muratori (2020), “Do Unemployment Insurance Benefits Improve Match Quality? Evidence from Recent U.S. Recessions”, NBER Working Paper No. 27574.
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