IMF Working Papers

Supply and Demand Effects of Unemployment Insurance Benefit Extensions: Evidence from U.S. Counties

Author/Editor:

Klaus-Peter Hellwig

Publication Date:

March 12, 2021

Electronic Access:

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Summary:

I use three decades of county-level data to estimate the effects of federal unemployment benefit extensions on economic activity. To overcome the reverse causality coming from the fact that benefit extensions are a function of state unemployment rates, I only use the within-state variation in outcomes to identify treatment effects. Identification rests on a differences-in-differences approach which exploits heterogeneity in county exposure to policy changes. To distinguish demand and supply-side channels, I estimate the model separately for tradable and non-tradable sectors. Finally I use benefit extensions as an instrument to estimate local fiscal multipliers of unemployment benefit transfers. I find (i) that the overall impact of benefit extensions on activity is positive, pointing to strong demand effects; (ii) that, even in tradable sectors, there are no negative supply-side effects from work disincentives; and (iii) a fiscal multiplier estimate of 1.92, similar to estimates in the literature for other types of spending.

Series:

Working Paper No. 2021/070

Subject:

Economic sectors Employment Financial crises Labor Labor markets Unemployment Unemployment rate

Frequency:

regular