Does Unemployment Insurance Worsen Unemployment?

In a Public Policy Brief posted by the FRB-Boston, Rand Ghayad, a visiting fellow at the bank, questions whether long-term unemployment insurance worsens unemployment. In theory, the program creates a strong disincentive for unemployed workers to seek and take a job. The paper is titled, “A Decomposition of Shifts of the Beveridge Curve.” This curve shows an inverse relationship between job openings as a percentage of the labor force and the unemployment rate.

The curve has shifted to the right since 2009 with more job openings for a given level of unemployment. One explanation for this shift is the increased availability of unemployment insurance benefits to the long-term unemployed. So this would suggest that allowing these benefits to expire should move many of the long-term unemployed back to work (or out of the labor force). That may be only half true, as the author of this paper reports:

Exploration of the evolution of job openings and unemployment using recent data on unemployed persons decomposed by their reason for unemployment, which determines their eligibility to collect benefits, suggests that up to half of the increase in the unemployment rate relative to the fitted Beveridge curve is explained by job leavers, new entrants, and re-entrants—those who are ineligible to collect unemployment benefits. Because unemployed job seekers who do not qualify to receive benefits compete for jobs with unemployed job losers who are eligible to collect UI, an unattractive vacancy that is refused by a job loser is likely be grabbed quickly by a new entrant or unemployed re-entrant who is not subject to any incentive effects. However, the evidence from the decompositions suggests that the increase in the unemployment rate relative to job openings will persist when unemployment benefit programs expire.