Do Unemployment Insurance Extensions Reduce Skill Mismatches?

Unemployment Insurance (UI) benefits help people cope with financial losses during periods of unemployment, but have also been found to prolong unemployment spells in the U.S. and several European countries. At the same time,... [ view full abstract ]

Unemployment Insurance (UI) benefits help people cope with financial losses during periods of unemployment, but have also been found to prolong unemployment spells in the U.S. and several European countries. At the same time, there is mixed evidence from European countries on whether extended UI benefits lead to high paid and better quality jobs. We examine the impact of UI extensions introduced during and in the aftermath of the Great Recession in the U.S. on wages, skill match quality and turnover after unemployment. Using the Current Population Survey, we find that longer UI duration increases wages in the job immediately after and up to one year after unemployment and reduces separations to unemployment one year after exiting unemployment. Furthermore, we find that longer UI durations increase the probability of being in a job with higher education requirements compared to the previous job and reduce the likelihood of being over-qualified in that job. This novel evidence on UI benefits reducing skill mismatches is consistent with productivity and welfare improvements in economies with more generous UI systems.