Total U.S. Unemployment Insurance (UI) benefit payments increase automatically during recessionary periods. This increase in UI benefits during recessionary periods cushions the macro economy from further decline by helping unemployed workers partially maintain their purchasing power. By partially compensating the unemployed for the lost earnings, UI benefits help to break the negative cycle of increased unemployment leading to reduced consumption which leads to a further reduction in economic activity. The cyclical response of regular UI benefits during recessions is sometimes enhanced through federally financed UI benefit extension. Thus, the regular UI program together with federally financed temporary benefit extensions can have a substantial impact in cushioning the negative effects of recessions on the U.S. economy.
This report examines the impact of the UI program in stabilizing the economy during a recession. The analysis relies heavily on macroeconomic simulations generated by an econometric model developed by Moody’s Economy.com. Rather than simulating an artificial recessionary scenario, we use the experience of the recent recession (2008-2009) and examine the time path of the economy with and without the UI program. The report examines the performance of the following UI program components as automatic economic stabilizers: regular UI benefits, temporary federal emergency unemployment compensation (EUC), and Federal-State Extended Benefits (EB). Our approach traces the path of the economy with and without each of these UI components.