Some Observations on Hagedorn, Karahan, Manovskii, and Mitman, “Unemployment Benefits and Unemployment in the Great Recession: The Role of Macro Effects”

Hagadorn and co-authors (HKMM) invite the interpretation that most of the large increase in unemployment since 2007 can be blamed on the rising generosity of unemployment insurance benefits, leaving little to blame on the financial crisis. But the paper does not make that claim. And the claim is incorrect. The right way to explain the claims of the the paper is that a policy of extending UI benefits when unemployment rises can amplify the effects of a small initial impulse that raises unemployment. That impulse, according to the paper, causes benefits to improve, which in turn results in a shift in bargaining power toward workers, lowering job-creation incentives and raising unemployment further. Figure 1 shows the amplification in a graph. The steeper blue line describes the policy of extending the duration of benefits in response to high unemployment. The paper discusses and documents the combination of standing policies based on unemployment triggers, gener-