Heading for the Exits: Unemployment Compensation and the Duration of Unemployment in an Economic Downturn

The effect of generous unemployment benefits on the propensity of individuals to stay on unemployment was hotly debated during the COVID pandemic. This paper examines the impact of the Federal Pandemic Unemployment Compensation (FPUC) using rich individual data for the universe of all UI claimants in the state of Illinois during both the introduction and the expiration of the FPUC. It finds that unemployed individuals’ exits were much more responsive to the opening of the economy than to the change in the generosity of benefits. Indeed, the effects of reduced benefit levels on the conditional probability of UI exit in the weeks immediately before and after the end of the FPUC supplement are substantially lower than those reported in previous studies: claimant responsiveness under the conditions of the pandemic labor market downturn is close to non-existent. Moreover, there is no strong labor supply response to the sharp drop in benefits for minorities and people at the low or high end of the education ladder. Finally, and consistent with anecdotal evidence, women appear to have a very different response from men. The baseline odds of exiting versus staying on unemployment rolls (holding all else constant) for females is 6.2% lower than for males.