From Policy to Paychecks: The Economic and Political Dynamics of UI Generosity

This paper investigates the distinct roles played by unemployment insurance (UI) generosity and lockdown strictness in shaping state-level labor market outcomes in the United States, particularly during mid-2021. Exploiting the cross-state variation that arose during this time, we leverage two instrumental variables – historical UI generosity and political leaning – to disentangle the supply- and demand-side effects. States at the low end of UI generosity replaced about 45% of prior wages, while the most generous states replaced about 90%, and this gap is associated with a 1.3 pp higher unemployment rate, with uncertain effects on unemployment duration. Moving from minimal to near-total lockdowns adds roughly 6 weeks to average unemployment spells and raises unemployment by about 0.4 pp. The findings contribute critical insights into effective policy evaluation during systemic shocks to supply and demand.