Clemson University TigerPrints All Dissertations Dissertations 12-2015 Estimating the Effect of Extended and Emergency Unemployment Benefits on the Long-term Unemployed James Jones Clemson University, [email protected] Follow this and additional works at: https://tigerprints.clemson.edu/all_dissertations Part of the Economics Commons Recommended Citation Jones, James, "Estimating the Effect of Extended and Emergency Unemployment Benefits on the Long-term Unemployed" (2015). All Dissertations. 1585. https://tigerprints.clemson.edu/all_dissertations/1585 This Dissertation is brought to you for free and open access by the Dissertations at TigerPrints. It has been accepted for inclusion in All Dissertations by an authorized administrator of TigerPrints. For more information, please contact [email protected]. ESTIMATING THE EFFECT OF EXTENDED AND EMERGENCY UNEMPLOYMENT BENEFITS ON THE LONG-TERM UNEMPLOYED A Dissertation Presented to the Graduate School of Clemson University In Partial Fulfillment of the Requirements for the Degree Doctor of Philosophy Economics by James Michael Jones December 2015 Accepted by: Dr. Curtis J. Simon, Committee Chair Dr. John T. Warner Dr. Raymond D. Sauer Dr. Scott L. Baier Abstract Unemployment insurance is designed to help workers smooth consumption in the event of a negative employment shock. These benefits are traditionally funded and administrated by the individual states and territories of the United States. The depth and severity of the “Great Recession” that started in December of 2007 and ended in June of 2009 was such that, Congress was compelled on multiple occasions to extend those benefits. Legislation during this period extended the duration of unemployment benefits to the longest period in history, as unemployed individuals in many states could receive up to 99 weeks of unemployment compensation. The policy goal was to help those individuals impacted by the recession rather than the chronically unemployed from earlier time periods. An arbitrary date was chosen for determining eligibility. The creation of the Emergency Unemployment Compensation (EUC) program created a “natural experiment” to test the impact of extended unemployment benefits. In this paper I analyze the effects of the EUC program on unemployment and wages after re-employment using data from the State of Kentucky. This study is based on administrative data from the Kentucky unemployment insurance system and includes information on all unemployment claims from January of 2006 to December of 2011. After an overview of the EUC program and the labor market conditions in Kentucky during the relevant time period, I examine the natural experiment created by the arbitrary effective date of the EUC program across two distinct cohorts in Kentucky. In the final section of this paper, I examine the relationship between extended unemployment ii compensation and post-unemployment wage outcomes for individuals that utilized the extended benefits of EUC as compared to those individuals that exited the unemployment insurance system in Kentucky after utilizing only the state benefit system. My estimates indicate that utilizing extended unemployment benefits had a large and statistically significant negative impact on the quarterly, reemployment wage earnings. Utilizing an instrumental variable approach to control for the potential endogeneity of the choice to reduce search effort, this study finds that after controlling for demographic and education characteristics, the utilization of extended unemployment benefits reduced workers annual reemployment earnings by thousands of dollars. iii Dedication To my family, with love and gratitude. iv Acknowledgments I would like to thank my advisor, Dr. Curtis J. Simon, for excellent guidance and advice in the completion of this dissertation. I am also grateful to Dr. John T. Warner, for all of his support and encouragement through my graduate program. Without Prof. Simon and Prof. Warner’s guidance, my career as an economist would not have been possible. I am grateful to Dr. Scott Baier for his thoughtful suggestions and encouragement. I am grateful to Dr. Raymond Sauer for his comments on my paper and presentations and for his continual support during my graduate studies at Clemson University. I would like to thank Dr. William Dougan, Dr. Michael Maloney, Dr. Daniel Benjamin, and the rest of the faculty of the John E. Walker Department of Economics for their support and encouragement during my course of studies. v Table of Contents Page Title Page ..........................................................................................................................i Abstract............................................................................................................................ii Dedication.......................................................................................................................iv Acknowledgments............................................................................................................v List of Tables ................................................................................................................viii List of Figures...............................................................................................................xiv Chapter Introduction....................................................................................................1 I. The Labor Market and Unemployment Insurance in Kentucky ....................5 Chronology of the Emergency Unemployment Compensation Program of 2008 ........................................................7 Data........................................................................................................15 Tables and Figures .................................................................................22 II. An Unintentional Natural Experiment.........................................................30 Background............................................................................................32 Data........................................................................................................39 Effects of EUC on Post-Unemployment Earnings And Job Match Quality....................................................................52 Conclusion .............................................................................................57 Tables and Figures .................................................................................58 III. Post-Unemployment Outcomes ...................................................................69 Related Literature...................................................................................70 Data and Summary Statistics .................................................................76 Empirical Approach...............................................................................85 Results....................................................................................................86 vi Table of Contents (Continued) Page Conclusion ...................................................................................................89 Tables and Figures .......................................................................................91 Appendices ...................................................................................................................105 A: Two-stage Least Squares Results for Chapter II........................................106 B: Two-stage Least Squares Results for Chapter III ......................................111 References.....................................................................................................................146 vii List of Tables Table Page I.1 Chronology of Emergency Unemployment Compensation.........................27 I.2 Summary Frequencies, Average Benefit Amount, and Weeks of UI Benefits.............................................................................28 I.3 Average Weeks of UI Benefits ....................................................................29 II.1 Summary Frequencies..................................................................................64 II.2 Average Benefit Amount and Weeks of UI Benefits...................................65 II.3 Two-Stage Least Squares on 2009 and 2010 Wages and Quarters Worked .............................................................................66 II.4 Two-Stage Least Squares on 2009 and 2010 Wages and Quarters Worked – Second Stage Estimates with Industry Dummy Variables............................................................67 II.5 Two-Stage Least Squares on 2009 and 2010 Wages and Quarters Worked – Second Stage Estimates with Industry and County Dummy Variables ........................................68 III.1 Summary Frequencies, Average Benefit Amount, and Weeks of UI Benefits.............................................................................91 III.2 Average Change in Quarterly Wages ..........................................................92 viii List of Tables (Continued) Table Page III.3 Average Change in Quarterly Wages – State UI and EUC Claimants .................................................................93 III.4 Difference in Quarterly Wages Earned in 2013...........................................94 III.5 Differences in Quarterly Wages Earned in First Full Quarter .....................95 III.6 Differences in Quarterly Wages Earned in First Exit Quarter.....................96 III.7 Two-Stage Least Squares on