Revisiting the macroeconomic impact of benefits generosity

This paper is an attempt to empirically investigate the macroeconomic effects of public policy on unemployment benefits. We address this issue by asking a simple question: How does public policy relating to unemployment benefits affect economic growth, productivity, and unemployment rate? We employ a dynamic panel VAR and perform a number of estimations, using data for several OECD countries. Overall, our results suggest that increases in unemployment benefits have both positive and adverse effects. In particular, we find that benefits generosity can increase output and productivity, but can also weakly raise unemployment rates in some cases. Our analysis in this paper calls into question the mainstream policy view of using reduction in unemployment benefits as a tool to improve macroeconomic outcomes.