THE DISINCENTIVE EFFECT OF UNEMPLOYMENT INSURANCE ON LABOR SUPPLY OF YOUNG ADULTS

Description
"Following the onset of the COVID pandemic, the disincentive effect of Unemployment Insurance (UI) has emerged as a vigorous area of policy debate. In the context of unprecedented expansions of UI eligibility among young adults under the 2020 CARES Act and the 2021 ARPA, this thesis seeks to contribute to the existing body of UI literature by assessing its disincentive effects on labor supply among young adults. UI was more important for this population during the COVID crisis due to the loosening of work history requirements under Pandemic Unemployment Assistance (PUA) expansion on federal UI programs. This paper will descriptively assess labor supply decisions among 18-24 and 25-34-year-olds as well as simulate UI generosity in the post-COVID context to highlight the importance of evaluating young labor supply responses to UI over this period. To establish a causal impact of UI generosity on transitions out of unemployment, I leverage policy variation identified in Holzer et al. (2021) to perform a difference-in-differences regression using the Current Population Survey. In these regressions, I control for the relative rate of COVID and the stringency of state public health mandates within a state by month. For the 25-34 age cohort, there are significant flows from unemployment to employment in states that prematurely ended both the PUA and FPUC. Among 18-24-year-olds, states ending extended UI benefits see significantly more flows from unemployment to not in the labor force (NILF), and fewer remaining unemployed, although this may be driven by preexisting seasonal differences. Young adults do not demonstrate sensitivity to UI benefit generosity on the intensive margin. A subsample analysis indicates that the disincentive effect is more pronounced among non-dependents, in accordance with UI policy specifics. Moreover, I show that the higher flows into NILF among college-aged adults are not attributable to college enrollment. Thus, I conclude that UI has meaningful effects on young adult labor supply behavior in the context of loosened work history requirements, but with meaningful heterogeneity across age cohorts."

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