The Importance of Unemployment Insurance as an Automatic Stabilizer

We assess the extent to which unemployment insurance (UI) mitigates the economy's sensitivity to shocks by working as an automatic stabilizer. Using a local labor market design based on heterogeneity in local benefit generosity (defined as the percentage of household income recovered by the unemployment benefit), we estimate that a one standard deviation increase in generosity attenuates the effect of adverse shocks on employment growth by 12% and on earnings growth by 18%. Consistent with the hypothesis that this effect derives from the local demand channel, we find that consumption is less responsive to local labor demand shocks in counties with more generous UI. Moreover, the average wage growth of employed workers is less elastic to local labor shocks when benefits are more generous. Our analysis finds that the local fiscal multiplier of UI expenditure is approximately 1.2-1.8. Overall, our results suggest that UI has a beneficial effect on the economy by decreasing its sensitivity to shocks.