New IMPAQ Study Reports on the Effect of Unemployment Insurance on the Nation's Economy

The U.S. Department of Labor, Employment and Training Administration recently released “The Role of Unemployment Insurance As an Automatic Stabilizer During a Recession”, an analysis of the impact of Unemployment Insurance (UI) benefits on employment and the Gross Domestic Product (GDP).

Using data drawn from various sources, including UI claims and earnings data obtained from selected states, this report analyzes estimates produced by Moody’s Economy.com, utilizing their proprietary economic simulation models.  The report was developed under contract with DOL/ETA for the UI Benefits Study and was authored by IMPAQ’s subcontractor Wayne Vroman of the Urban Institute.

To conduct the analysis, annual state-level UI benefit payments and tax data since 1974 was converted to quarterly data for input into the Moody’s model.  Rather than simulating an artificial recession, researchers utilized recent recession experience (2008-2009) to examine the time path of the economy with and without the UI program.

This analysis resulted in the following findings related to the effect of UI on GDP and employment:

• The regular UI program closed about one-tenth (0.105) of the real GDP shortfall caused by the recession; Extended benefits closed about one-twelfth (.085) of the real GDP shortfall caused by the recession;
• Combining all UI tiers (regular and extended) overall, the UI program closed 0.183 of the gap in real GDP caused by the recession;
• Because of lags reflected in experience rating, the response of UI taxes was delayed with little increase in UI taxes occurring in 2009 and 2010.  From the third quarter of 2008 through the second quarter of 2010, increased UI taxes had essentially no effect on real GDP (a gap closing proportion of -0.007);
• The net effect of UI benefits and taxes on employment was estimated to be an increase of 1,050,000 jobs; and
• There is reason to believe that for this particular recession, the UI program provided stronger stabilization of real output than in many past recessions because extended benefits responded strongly.  Calculated multiplier effects in real GDP for every $1.00 of UI benefits paid were estimated to average $2.00 for regular UI benefits and also $2.00 for extended benefits.