Penn Study: Unemployment Benefit Extensions Contribute to Unemployment

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Media Contact:Jacquie Posey | | 215-898-6460January 16, 2014

The extension of unemployment benefits can account for much of the persistently high unemployment in the United States since the end of the Great Recession, according to a study led by University of Pennsylvania economics scholars.

The research team includes Iourii Manovskii, associate professor of economics at Penn; Kurt Mitman, a doctoral candidate in economics; Fatih Karahan, an economist at the Federal Reserve Bank of New York and a Penn alum; and Marcus Hagedorn, a professor at Oslo University.

The report, released as a National Bureau of Economic Research Working Paper, is entitled  “Unemployment Benefits and Unemployment in the Great Recession: The Role of Macro Effects.”

On Jan. 1, the Emergency Unemployment Compensation program, initially passed in July 2008, expired.  The question of whether to re-authorize the program is an ongoing policy debate facing the country.

The study concludes that extending unemployment benefits exerts an upward pressure on the equilibrium wage. This lowers the profits employers receive from newly created jobs, leading to a decline in new job creation. The resulting reduced number of job vacancies leads to an increase in unemployment and a decrease in new hires.

The research has drawn the attention of policy makers in Washington in addition to the academic community. In December, Manovskii and Mitman presented the research to the House Ways and Means Committee, the Congressional Budget Office and the Joint Economic Committee of Congress.

The Council of Economic Advisers to the President released a report in December that criticized the study, to which the researchers released a rebuttal.

The researchers contend that most of the criticism of their study has been politically motivated. 

“We have been disappointed that our critics have focused mainly on the politics and not the economics,” said Mitman, who works as a research assistant at the National Bureau of Economic Research and New York University while pursuing his doctorate from Penn. “We are excited, however, by the tremendous interest in our study. We believe it will lead to more informed policy making and stimulate debate at a deeper and scientifically more informed level.”