The Moral Hazard of Unemployment Benefits: Examining the Effect of Unemployment Insurance Policies on Job Search Intensity

Abstract

Economists and policy makers have long been concerned with the moral hazards which may arise from social insurance programs. Nonetheless, the duration of unemployment insurance (UI) benefits in the United States rose to historic heights in response to growing levels and lengths of unemployment spells which occurred during the Great Recession. Beginning in June 2008, a series of federal expansions to UI policy extended the duration of UI from 26 weeks to a peak of 99 weeks. Using online search data for job related terms on Google, I create a state-weekly measure of job search intensity. I first establish the validity of the job search index by comparing it to levels of job search reported in the American Time Use Survey. Next, using a difference-in-differences estimation technique, I assess the response of job search to expansions and reductions in UI policies. I find that an increase in one percent of the population receiving extended benefits results in decrease in aggregate job search by .43% in the third week after the policy change, whereas contractions in policies lead to a .47% increase in job search. I also perform a principal component analysis in order to construct a UI generosity score for each state. I demonstrate that states with more generous UI programs have less overall levels of aggregate job search, regardless of whether the federal policy has been triggered within the state. The principal component analysis also reveals that of the various dimensions defining a state’s UI generosity, the amount of weekly benefit contributes the most to declines in job search levels. My findings suggest the presence of a mild moral hazard effect resulting from increased UI.