Unemployment Insurance Incentives and Unemployment Duration Distributions

The impact of unemployment insurance on the distribution of unemployment durations was examined. Employer incentives, as well as employee incentives, were considered. A benefit replacement ratio was used to measure the unemployment insurance incentive. It is found that for the unemployed, unemployment insurance subsidizes unemployment and search theory implies an increase in the mean duration of unemployment. States with larger ratios of benefit replacement were found to have longer unemployment durations. Because of unemployment insurance's incomplete experience rating, high layoff employers are subsidized by low layoff employers. Findings indicated that employers respond to unemployment insurance system incentives. There were higher frequencies of short duration unemployment when experience ratings were lower. The converse was also suggested.