Why do Unemployment Benefits Raise Unemployment Durations? Moral Hazard vs. Liquidity / Raj Chetty.

Format:

Book

Author/Creator:

Chetty, Raj.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w11760.

NBER working paper series no. w11760

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2005.

Summary:

It is well known that unemployment benefits raise unemployment durations. This result has traditionally been interpreted as a substitution effect caused by a distortion in the price of leisure relative to consumption, leading to moral hazard. This paper questions this interpretation by showing that unemployment benefits can also affect durations through an income effect for agents with limited liquidity. The empirical relevance of liquidity constraints and income effects is evaluated in two ways. First, I divide households into groups that are likely to be constrained and unconstrained based on proxies such as asset holdings. I find that increases in unemployment benefits have small effects on durations in the unconstrained groups but large effects in the constrained groups. Second, I find that lump-sum severance payments granted at the time of job loss significantly increase durations among constrained households. These results suggest that unemployment benefits raise durations primarily because of an income effect induced by liquidity constraints rather than moral hazard from distorted incentives.

Notes:

Print version record

November 2005.