Latent and Behavioral Responses to Extensions in Unemployment Insurance Benefits

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IZA Seminar

Place: Schaumburg-Lippe-Str. 9, 53113 Bonn

Date: 03.05.2011, 12:15 - 13:30


Presentation by 

Gordon B. Dahl (University of California, San Diego)


An important question facing economists and policymakers is how long individuals would collect unemployment insurance (UI) if it were made available for a longer period of time. This is a difficult task for two reasons. First, even though distributional assumptions generally make little di fference for the non-censored portion of a survival curve (e.g., before UI bene fits are exhausted), they can have a large impact past the censoring point. Second, there may be a behavioral response to any change in the maximum allowed bene fit duration. To estimate the survival function past the censoring point, I adopt a semiparametric approach which builds on Chen, Dahl, and Khan (2005). I exibly model the location and scale parameters of an accelerated failure time (AFT) model, without making distributional assumptions about the error term. Using administrative-level data from New Jersey's UI system, I fi nd the commonly-used Weibull model signi ficantly biases UI exit rates upward compared to my semiparametric approach (which includes the Weibull model as a special case). By incorrectly predicting a quick dropo in UI claims, the Weibull model greatly underestimates the costs of extending bene fits, even in the absence of a behavioral response. I also take advantage of a unique policy experiment, which exogenously increased the maximum duration from 26 to 39 weeks. This allows estimation of the latent versus behavioral response to an extension in UI bene fits. I find that most of the behavioral response occurs in the choice of whether to enter the extended bene fits program at 26 weeks, and not in the decision to exit the UI system between weeks 26 to 39.

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