Alexey Gorn, University of Cambridge (Job Market Seminar)

"Assessing the (De)Stabilizing Effects of Unemployment Benefit Extensions"


We study the role of unemployment benefit extensions for aggregate labor market dynamics. We develop a tractable model with heterogeneous agents, search frictions and nominal rigidities. The model allows for both a destabilizing labor market channel and a stabilizing aggregate demand channel of unemployment insurance. The tractability of the model permits to investigate the workings of each channel in isolation. We find that both channels are quantitatively important and of similar magnitude: the aggregate demand channel marginally prevails when the model is calibrated to the U.S. economy. We also show that unemployment benefit extensions played a very limited role for unemployment dynamics during the Great Recession and its aftermath. Instead, we can explain the bulk of the increase in unemployment and its persistence with a combination of labor market shocks and a shock to the borrowing constraint faced by households.

Contact person: Emiliano Santoro