The Effects of UI Benefits on Labor Supply During and Before the COVID-19 Pandemic

During the COVID-19 crisis the U.S. increased UI benefits substantially, leading to earnings replacement rates above 100% for many workers. In this paper, we use the universe of micro records on UI claims from the state of California going back over 15 years to study the impact of UI benefits on labor supply and job outcomes during the COVID-19 crisis, and contrast it with the variation of effects in booms and recessions before the crisis. Our main estimation strategy exploits the fact that UI benefits rise linearly with earnings up to a maximum, leading to a sharp kink that allows us to implement a Regression Kink Design (RKD) to estimate the effect of UI benefit changes on a range of outcomes. We also analyze the effect of sharp changes in UI benefits during the COVID-19 crisis. Preliminary estimates suggest that increase in UI benefits during the COVID-19 crisis raised unemployment durations for affected workers. These estimates do not imply increases in unemployment or reduction in hiring rates because they may be offset by workers not covered by UI.

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