NEW YORK— Unemployment insurance has long been a source of partisan controversy with many people claiming that such benefits are a major employment disincentive. However, new research from Columbia Business School provides evidence that unemployment insurance helps stabilize the economy.
The study, The Importance of Unemployment Insurance as an Automatic Stabilizer, shows how unemployment insurance acts as an automatic stabilizer and that the more generous the unemployment insurance benefits are, the better the region fares overall. The research explains that as demand for products and services decline due to unemployment, the unemployment insurance allows for continual cash flow in the community, which can help preserve regional and local economic activity, even in the face of mass layoffs.
“We compared differences in the generosity of each states’ unemployment insurance programs,” said Marco Di Maggio, co-author of the study and professor at Columbia Business School. “Our findings show that unemployment insurance appears to have a beneficial effect on the economy by decreasing its sensitivity to economic shocks and reducing the variability in total income, employment in the non-tradable sector and durable consumption.”
Di Maggio, and his co-author Amir Kermani from the University of California at Berkeley, constructed for each county a measure of the predicted change in demand-driven labor shocks and found that counties in states with more generous unemployment insurance react significantly less to economic shocks driven by falling demand. The study concludes that more generous unemployment insurance significantly dampens the effect of negative shocks on the real economy by boosting aggregate demand.
As the Bureau of Labor Statistics released weaker than expected jobs reports in both September and August, signs are pointing to increased unemployment, which makes the debate on the effectiveness and adequacy of the unemployment insurance system extremely relevant. Di Maggio’s research demonstrates that in the face of a potentially declining job market, the economy can be substantially aided by more generous unemployment insurance.
To learn more about the cutting-edge research being conducted at Columbia Business School, please visit www.gsb.columbia.edu.
About Columbia Business School
Columbia Business School is the only world–class, Ivy League business school that delivers a learning experience where academic excellence meets with real–time exposure to the pulse of global business. Led by Dean Glenn Hubbard, the School’s transformative curriculum bridges academic theory with unparalleled exposure to real–world business practice, equipping students with an entrepreneurial mindset that allows them to recognize, capture, and create opportunity in any business environment. The thought leadership of the School’s faculty and staff, combined with the accomplishments of its distinguished alumni and position in the center of global business, means that the School’s efforts have an immediate, measurable impact on the forces shaping business every day. To learn more about Columbia Business School’s position at the very center of business, please visit www.gsb.columbia.edu.