Delayed Collection of Unemployment Insurance in Recessions

Abstract

Contrary to assumptions in the unemployment insurance (UI) literature, this paper argues that unemployed workers do not always lose uncollected UI benefits when they start a new job. Instead, they may postpone the collection of leftover benefits to future unemployment spells. Further, using cross-time and cross-state variations in UI policies, the paper finds empirical evidence that allowing unemployed workers to delay the collection of benefits increases their incentives to find a job during recessions when wages are low, job separation rates are high, and UI benefits are extended. I quantify the effects of the policy of allowing delayed collection of benefits on aggregate unemployment by introducing endogenous search effort, benefit eligibility, and wage indexed benefits into a standard search-and-matching framework. The model demonstrates how the policy increases the future value of employment even though more generous UI benefits in general reduce the net value of employment. Using a calibrated model,I find that allowing delayed benefit collection raises the proportion of unemployed workers receiving benefits and reduces the unemployment rate during 2009–2012.