The Labor Market in the Great Recession: What Role for the Supply Side?

Among the most pressing and persistent questions about the Great Recession are these: Why has the U.S. labor market been so slow to recover, leaving unemployment rates near nine percent more than two years after the official end of the recession? Why has the share of long-term unemployment (> 27 weeks) risen to such unprecedented levels, currently standing at about 45% of total unemployment? And, have Congressional efforts to cushion the effects of mass unemployment by extending unemployment insurance worked to improve the well-being of the unemployed, or has extended unemployment insurance had the perverse effect of prolonging unemployment? Berkeley labor economist Jesse Rothstein proposes to undertake a portfolio of studies over the next two years covering all three questions.

During the last three years, unemployment insurance (UI), which is normally limited to 26 weeks in the U.S., has been stretched out to a maximum of 99 weeks – first by the Extended Benefits program, which allows an additional 20 weeks in states with high levels of unemployment, and then by six different emergency extensions of UI benefits voted by Congress, as the high rates of joblessness persisted in the wake of the recession. Using the longitudinal feature of the Current Population Survey (CPS), which makes it possible to track a worker’s employment history and benefit use over the course of 16 months, Rothstein has been able to study the impact of the expected duration of UI benefits at the time a worker becomes unemployed on subsequent job-finding and labor force participation.

Rothstein now proposes to use the same analytic strategy to examine the effects of the expected duration of unemployment insurance on the use of other benefit programs, such as food stamps (SNAP), family assistance (TANF), Medicaid, and Disability Insurance (DI). He reasons that the longer UI lasts, the more recipients may defer the use of other safety-net programs like food stamps and disability insurance, thus lowering the net cost of the social safety net during periods of high unemployment. Some of these effects may be very large. Once on disability insurance, for example, a worker rarely returns to productive employment. If UI extensions delay DI applications, or prevent them entirely by lengthening job search, even a small effect would be enough to generate large net savings. Rothstein also plans to look at the effects of UI benefit extension on “self insurance” within families – by seeing how the labor supply of other family members is affected when one worker in the family exhausts his or her benefits. A jump in other family members’ employment would suggest that families are able to self-insure to a significant extent.