November 2022

These Caps Spilleth Over: Equilibrium Effects of Unemployment Insurance

Cynthia L. Doniger and Desmond Toohey

Abstract:

The design of US unemployment insurance (UI) policy--which features benefits assigned as a percentage of past wages up to a cap--engenders tests for spillovers from policy variation to workers who are not directly treated. We test for and find a pattern of spillovers from state-level UI policy changes that cannot be neatly reconciled with workhorse or cutting-edge models of UI spillovers. Instead, we show that the documented pattern conforms with the predictions of a canonical model of information frictions: wage posting with random search. Taken together, our results provide novel evidence of quantitatively- and policy-relevant information frictions in this market. Moreover, our estimates suggest that aggregate unemployment of insured individuals would decrease if the replacement rate were increased while holding the cap constant.

DOI: https://doi.org/10.17016/FEDS.2022.074

PDF: Full Paper

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Last Update: November 04, 2022