Unemployment Benefits and Work Incentives: The U.S. Labor Market in the Great Recession

In the midst of massive job destruction and sharply rising long-term unemployment, a series of unemployment insurance (UI) eligibility extensions were enacted in 2008-09 that raised the regular 26-week limit to as many as 99 weeks. In response, many leading economists and business press editorials invoked the 'laws of economics' to warn that since extended benefits reduce work incentives, UI extensions would exacerbate the long-term unemployment problem. This paper reviews the evidence put forward in support of the orthodox prediction, which has relied on extrapolating from pre-Great Recession conditions, particularly through the application of "spike at benefit-exhaustion" findings from the early 1980s. Much more compelling evidence can be found by direct examination of the 2008-10 data, which shows no support for UI related work disincentive effects.