Congress turned to a familiar policy tool to revive the US economy during the pandemic: extending jobless benefits. This move reignited a longstanding debate over whether more generous unemployment compensation discourages job seekers or provides stimulus to the economy.

A recent study from the University of Chicago Booth School of Business attempted to answer this question by analyzing how expanded unemployment insurance affects aggregate demand for goods and services in an economy.

Unlike previous studies, the author’s economic model considered not only the effects of UI on job search intensity but also on companies’ hiring decisions and consumers’ demand for goods. The model was applied to the Great Recession of 2007-2009, examining 13 US policy moves on unemployment insurance from May 2008 through December 2014.

Extended compensation

The researcher found that extended compensation programs helped to decrease the unemployment rate and ultimately increase employment through two channels.

First, people receiving jobless benefits are more likely to spend the money rather than save it, leading to an increase in overall demand for goods and services. Second, unemployment benefits provide a financial safety net, allowing job seekers to take more time to find suitable employment. The researcher estimated that without the extended compensation programs, an additional 60,000 workers could have been affected.

However, the researcher also found that monetary conditions at the time were crucial in determining the effectiveness of extended benefits in boosting employment. The study suggests that more generous jobless benefits can stimulate demand and bolster employment, particularly among those unemployed for more than six months, but should be implemented carefully with consideration of prevailing economic conditions.

Unemployment support

The extension of unemployment insurance benefits in the United States between 2008 and 2014 resulted in a decrease in the unemployment rate by up to 0.4 percentage points. This reduction was driven by two channels.

First, people who were unemployed for a longer period and receiving benefits were more likely to spend their money, thus increasing aggregate demand for goods and services. Second, individuals who were employed or unemployed for a short while became more willing to spend their own money, knowing that jobless benefits were available if needed.

However, the effectiveness of this policy tool is dependent on monetary policy. The researcher’s model took into account the low nominal interest rates during the Great Recession, but cautions that these results may not hold if monetary policy shifts towards raising interest rates.

This would offset any stimulus to demand and ultimately lead to a fall in employment. As the Federal Reserve currently raises interest rates to combat inflation, the model suggests that extending benefits may not be as effective in spurring the economy at present.