Reexamining the consumption smoothing benefits of Unemployment Insurance

The Great Recession spurred renewed interest in the moral hazard effects of the Unemployment Insurance (UI) program, however little research has focused on determining its benefits. This paper examines the consumption smoothing benefit of the UI program over the last 40years, finding strong evidence of heterogeneity in this effect over time. In particular, the effects of UI are smaller in the 1990s compared with the 1970s. The 1990s were unique because of the long period of low unemployment rates as well as relatively low UI program generosity, thus we test whether the consumption smoothing effects vary by the state unemployment rate and average program generosity. We find suggestive evidence that the effects are larger when the state unemployment rate and average generosity are high. Together, these two dimensions can explain around 30–46% of the differential effect that we find in the 1990s.