The Hidden Benefits of Unemployment Insurance
Skip to content
Policy Finance & Accounting Aug 4, 2014

The Hidden Benefits of Unemployment Insurance

A pioneering study reveals that the benefits of unemployment insurance include reductions in mortgage defaults and improved access to credit.

Unemployment Insurance helps people save their houses

Yevgenia Nayberg

Based on the research of

Joanne W. Hsu

David A. Matsa

Brian Melzer

Unemployment insurance (UI) is the third-largest government program for transferring funds to the needy, behind only Social Security and government-sponsored health care. Though the program is sometimes criticized for reducing the motivation to find work, over the years economists have attributed a number of social benefits to it. UI provides the recently unemployed with the means to buy groceries, gas, and clothing, driving up overall consumer spending, which can be particularly helpful in a recession. It also provides job seekers with the resources to pass up less desirable opportunities while hunting for the right position.

Add Insight
to your inbox.

Recent research by a team that included two Kellogg School of Management professors suggests that UI’s social benefits extend much further than previously believed. The expansion of UI “played an important role in preventing foreclosures during the Great Recession,” says Brian Melzer, an assistant professor of finance. Melzer and David Matsa, an associate professor of finance, collaborated on the study with Joanne Hsu of the Federal Reserve Board of Governors in Washington, D.C.

The researchers estimate that between 2008 and 2012, the program helped to avert $70 billion in social costs from foreclosures, including depreciation in the foreclosed properties’ structural values, decline in neighboring home values, and transaction costs paid by lenders and households. In addition, the expansion improved access to credit for a broad swath of poor individuals, including people who never had to draw on the insurance. In a broader sense, the study argues for the effectiveness of public policies like unemployment insurance that improve people’s ability to pay off their debts, as opposed to merely improving their incentive to pay them off.

Income Risk and Default

The research project started with the intuitive feeling that, as Melzer explains, “reducing household income risk would reduce default.” However, he continues, “it was uncertain how big the effect would be.” When the research began, nobody had yet investigated the link between mortgage default and workers’ job histories. Making that connection enabled the researchers to provide new insights.

To determine the extent of the relationship between income risk and default, the researchers used the fact that the level of unemployment insurance varies among states. In the basic program, unemployed individuals can receive half of their income for up to six months if they haven’t found a job. But the weekly benefit is subject to a cap. As a result, the total benefits currently available range from $6,000 in Mississippi to $28,000 in Massachusetts. In response to the Great Recession, the federal government helped states offer extra payments, with amounts dependent in part on those states’ unemployment rates. The government provided extra funding that increased the duration of UI—for example, in the time period the researchers studied, recipients qualified for 20 additional weeks of benefits totaling up to $6,000 in South Dakota but 53 additional weeks of benefits worth up to $31,000 in New Jersey. The researchers then tracked mortgage delinquency trends for employed and unemployed households between 1991 and 2011, matching them to these differences across states.

Implications for Housing Policy

The results show a significant correlation between UI and improved financial circumstances for individuals. The impact on housing proves surprisingly large. An increase of $3,600 in a state’s maximum regular UI benefits prevents 15% of the average mortgage delinquencies caused by layoffs. Over the long term, that serves to reduce foreclosures among unemployed homeowners. “These effects are sizable,” the team writes. “[T]he increase in evictions, a subset of defaults, associated with being laid off is cut almost in half.”

[The figures below show the relationship between the maximum amount of extended UI benefits a household is eligible to receive in a given state and the percentage of delinquent mortgagors in that state (as of May 2009). As maximum UI increases, delinquent mortgages decrease—but only among households that experienced unemployment.]

Households Experiencing Unemployment

Households Experiencing No Unemployment

The impact applies even to mortgage holders who owed significantly more than the value of their houses. “A policy like UI that improves a household’s ability to repay debt is effective even for households deeply in debt and underwater on their mortgages,” Melzer says. That is,even the households with the greatest incentive to strategically default are more likely to stay in their homes.

Intriguingly, UI provides mortgage relief more effectively than programs dedicated to that goal, such as the Home Affordable Refinance Program and the Home Affordable Modification Program. It does so, the team explains, by transferring money directly to homeowners, bypassing lenders and loan services. “We’re not saying that UI is the perfect policy to prevent mortgage foreclosures. Half of UI recipients rent or have no mortgage. But the effect—avoiding 1.4 million foreclosures—is too big to be ignored,” Matsa says.

In addition to the social benefits of avoiding the foreclosures, these effects also reduced the cost of providing UI to households in need. That’s because the federal government effectively guarantees many mortgage payments through Fannie Mae and Freddie Mac, allowing money saved by preventing foreclosures to essentially offset some of the money spent on UI. “We estimate that avoiding foreclosures reduced the cost of extending UI during the Great Recession by about 20 percent,” Matsa says.

Beyond Housing

But the benefits of UI are not restricted to the unemployed—or for that matter, their neighbors, communities, and lenders. By reducing the likelihood that unemployed borrowers would default, unemployment insurance has an additional consequence: It improves the creditworthiness of individuals at risk of being laid off.

By analyzing mortgages, home equity lines of credit, and credit card loans, the researchers were able to determine that households—even those experiencing no loss of employment—enjoy expanded access to credit, including lower interest rates and higher credit limits. Overall, interest rates decline by 1.4 percent and credit limits jump by $1,700 for every $3,600 increase in maximum UI benefits. For households earning less $35,000 a year, the decrease in interest rates and increase in credit limits are substantially greater.

The study suggests that, despite the costs of implementing and expanding UI, the program provides even broader societal value than previously understood. Policy makers should keep these benefits in mind as they consider programs that offer direct financial assistance to individuals looking to get back in the black. “Because costs spill over from housing default, our findings show that UI benefits the neighbors of the unemployed and the financial system overall,” Melzer says. “You don’t have to lose your job to benefit from unemployment insurance,” Matsa adds. “People often benefit from social insurance even if they never draw a payment.”

About the Writer
Peter Gwynne is a freelance writer based in Sandwich, Mass.
About the Research

Joanne W. Hsu, David A. Matsa, and Brian T. Melzer, “Positive Externalities of Social Insurance: Unemployment Insurance and Consumer Credit,” Working paper, July 2014.

Read the original

Most Popular This Week
  1. What Happens to Worker Productivity after a Minimum Wage Increase?
    A pay raise boosts productivity for some—but the impact on the bottom line is more complicated.
    employees unload pallets from a truck using hand carts
  2. 6 Takeaways on Inflation and the Economy Right Now
    Are we headed into a recession? Kellogg’s Sergio Rebelo breaks down the latest trends.
    inflatable dollar sign tied down with mountains in background
  3. How to Get the Ear of Your CEO—And What to Say When You Have It
    Every interaction with the top boss is an audition for senior leadership.
    employee presents to CEO in elevator
  4. 3 Tips for Reinventing Your Career After a Layoff
    It’s crucial to reassess what you want to be doing instead of jumping at the first opportunity.
    woman standing confidently
  5. How Offering a Product for Free Can Backfire
    It seems counterintuitive, but there are times customers would rather pay a small amount than get something for free.
    people in grocery store aisle choosing cheap over free option of same product.
  6. Which Form of Government Is Best?
    Democracies may not outlast dictatorships, but they adapt better.
    Is democracy the best form of government?
  7. When Do Open Borders Make Economic Sense?
    A new study provides a window into the logic behind various immigration policies.
    How immigration affects the economy depends on taxation and worker skills.
  8. Why Do Some People Succeed after Failing, While Others Continue to Flounder?
    A new study dispels some of the mystery behind success after failure.
    Scientists build a staircase from paper
  9. How Are Black–White Biracial People Perceived in Terms of Race?
    Understanding the answer—and why black and white Americans may percieve biracial people differently—is increasingly important in a multiracial society.
    How are biracial people perceived in terms of race
  10. How Has Marketing Changed over the Past Half-Century?
    Phil Kotler’s groundbreaking textbook came out 55 years ago. Sixteen editions later, he and coauthor Alexander Chernev discuss how big data, social media, and purpose-driven branding are moving the field forward.
    people in 1967 and 2022 react to advertising
  11. College Campuses Are Becoming More Diverse. But How Much Do Students from Different Backgrounds Actually Interact?
    Increasing diversity has been a key goal, “but far less attention is paid to what happens after we get people in the door.”
    College quad with students walking away from the center
  12. What Went Wrong at AIG?
    Unpacking the insurance giant's collapse during the 2008 financial crisis.
    What went wrong during the AIG financial crisis?
  13. Immigrants to the U.S. Create More Jobs than They Take
    A new study finds that immigrants are far more likely to found companies—both large and small—than native-born Americans.
    Immigrant CEO welcomes new hires
  14. Podcast: Does Your Life Reflect What You Value?
    On this episode of The Insightful Leader, a former CEO explains how to organize your life around what really matters—instead of trying to do it all.
  15. How Peer Pressure Can Lead Teens to Underachieve—Even in Schools Where It’s “Cool to Be Smart”
    New research offers lessons for administrators hoping to improve student performance.
    Eager student raises hand while other student hesitates.
  16. Why Well-Meaning NGOs Sometimes Do More Harm than Good
    Studies of aid groups in Ghana and Uganda show why it’s so important to coordinate with local governments and institutions.
    To succeed, foreign aid and health programs need buy-in and coordination with local partners.
  17. How Will Automation Affect Different U.S. Cities?
    Jobs in small cities will likely be hit hardest. Check how your community and profession will fare.
    How will automation affect jobs and cities?
More in Policy