Essays on unemployment insurance and the business cycle

The purpose of this dissertation is to analyze the interaction between unemployment insurance (UI) in the United States and the business cycle. In the first essay, I develop a search model to determine the optimal adjustment of UI benefits over the business cycle. The model strongly supports the notion that increasing the generosity of unemployment insurance for the long-term unemployed during recessions increases welfare. In the United States, the mechanism for triggering extensions to UI benefits is based on a state's unemployment rate reaching certain thresholds. This mechanism is poorly designed and causing extensions to be available in only handful of states in the prior two recessions. The second essay analyzes the ability of Markov Switching (MS) models to identify cyclical downturns in the labor market when extensions to UI benefits would be appropriate. Extending benefits during the downturns identified by a MS model of the average duration of unemployment more closely aligns extensions to periods of low job finding and high exhaustion rates than the current program and other proposed alternatives. In the last essay I focus on the effects of the U.S. automatic extension program on search behavior. Under this program there is a level of uncertainty regarding an individual's benefit entitlement because extensions are contingent on the level of state unemployment rates. I use a regression discontinuity approach to identify the effects of the program on the length of unemployment spells and county-level unemployment rates. While I find that benefit extensions have a significant impact on both of these measures, the uncertainty involved in this program may account for the small magnitude of its estimated effect on county-level unemployment rates. The conclusions of this dissertation can serve as a guide for policymakers in terms of designing an optimal UI system, determining when labor market downturns occur and understanding the effect of automatically increasing benefits during recessions on individual search behavior.