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Publications
  • 2017
  • Working Paper
  • HBS Working Paper Series

The Importance of Unemployment Insurance as an Automatic Stabilizer

By: Marco Di Maggio and Amir Kermani
  • Format:Print
  • | Language:English
  • | Pages:73
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Abstract

We assess the extent to which unemployment insurance (UI) serves as an automatic stabilizer to mitigate the economy's sensitivity to shocks. Using a local labor market design based on heterogeneity in local benefit generosity (defined as the percentage of household income recovered by the unemployment benefit), we estimate that a one standard deviation increase in generosity attenuates the effect of adverse shocks on employment growth by 7% and on earnings growth by 6%. Consistent with the hypothesis that this effect derives from the local demand channel, we find that consumption is less responsive to local labor demand shocks in counties with more generous benefits. Our analysis finds that the local fiscal multiplier of unemployment insurance expenditure is approximately 1.9. Overall, our results suggest that UI has a beneficial effect on the economy by decreasing its sensitivity to shocks.

Keywords

Unemployment Insurance; Automatic Stabilizers; Bartik Shocks; Volatility; Aggregate Demand; System Shocks; Employment; Balance And Stability; Insurance; Volatility; Insurance Industry

Citation

Di Maggio, Marco, and Amir Kermani. "The Importance of Unemployment Insurance as an Automatic Stabilizer." Harvard Business School Working Paper, No. 17-009, July 2016. (Revise and Resubmit to American Economic Journal: Macroeconomics.)
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About The Author

Marco Di Maggio

Finance
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