We study the stabilizing role of benefit extensions. We develop a tractable quantitative model with heterogeneous agents, search frictions, and nominal rigidities. The model allows for a stabilizing aggregate demand channel and a destabilizing labor market channel. We characterize each channel analytically and find that aggregate demand effects quantitatively prevail in the US. When feeding-in estimated shocks, the model tracks unemployment in the two most recent downturns. We find that extensions lowered unemployment by a maximum of 0.35 pp in the Great Recession, while the joint stabilizing effect of extensions and benefit compensation peaked at 1.08 pp in the pandemic.
Author(s): Alexey Gorn, Antonella Trigari
Keywords: Cyclical unemployment insurance; heterogeneous agents; search frictions; nominal rigidities; Great Recession; Covid-19 recession
JEL codes: E24, E32, E52, J63, J64, J65