What would happen if Indiana cut unemployment benefits?
Shortening the potential benefits period for unemployment insurance could make workers worse off and our labor market less efficient.
Indiana lawmakers are proposing to cut the potential duration of unemployment insurance (UI) benefits from 26 weeks to 14 weeks, following similar moves by several other states in recent years. While proponents argue this will encourage faster returns to work, recent research questions the size of the effects and suggests there are important downsides. Cutting unemployment benefits might achieve the goal of slightly faster returns to work, but the evidence suggests this might come at a significant cost to workers and to the broader economy.
Regular unemployment benefits in the United States are available for up to 26 weeks in most states. This is already shorter than the typical benefits duration in developed countries, though the U.S. does tend to extend benefits during recessions. A maximum duration of 14 weeks would be the 4th shortest of all 50 states.
Will Shorter Benefits Increase Employment?
The most common justification offered for shortening unemployment benefits duration is that it will increase job-finding rates and re-employment. Studies generally suggest that cutting unemployment benefits duration by one week reduces unemployment duration by about 0.1-0.2 weeks1, though these estimates are affected by significant publication bias2. Effects are likely to be smaller during periods of low unemployment than during recessions3, and effects will be even smaller in the U.S. where UI benefits duration is already relatively low4. For Indiana's proposed 12-week reduction, this suggests that workers might, at best, find jobs 1-2 weeks faster on average.
The Costs of Shorter Unemployment Benefits
But faster job-finding comes at a price. This is because unemployment benefits subsidize job search, which is a productive activity. Recent research has found that increasing unemployment benefits duration can lead to higher job quality and higher re-employment wages5. The additional liquidity provided by unemployment benefits allows workers more time to find positions that better match their skills and provide higher wages, especially for workers who might otherwise not have the funds for a longer job search6. The higher-quality matches between workers and jobs also mean that workers stay at their new jobs longer than they otherwise would7.
All of this matters not just for individual workers, but for the broader economy. When workers are forced into poor job matches, it can lead to higher turnover, lower productivity, and reduced economic growth.
Additional potential costs of shortened unemployment benefits include lower labor force participation8 and more poverty9. Workers who fail to find work before exhausting unemployment benefits become more likely to drop out of the labor force entirely. They also face higher poverty rates and require more support from public assistance programs such as SNAP and Medicaid.
Who Stands to Gain from Shorter Benefits?
When unemployment benefits expire quickly, workers face intense pressure to accept any available job, regardless of pay, working conditions, or fit with their skills. So if cutting benefits forces workers to accept jobs that are a worse fit, then who benefits? The main beneficiaries are likely to be employers in low-wage, high-turnover industries, who may find it easier and less costly to fill positions in an environment where workers have less flexibility and less bargaining power due to shortened benefits.
That’s why, in state after state, UI benefits cuts are being pushed by business lobbying groups and CEOs. In many cases, the groups backing these cuts are the same as the ones attempting to strip away workplace protections and roll back long-standing child labor laws.
Cohen and Ganong (2024) find that after correcting for publication bias, the elasticity of unemployment duration with respect to benefit duration is 37-50% smaller than previously estimated, and is likely lower at relatively shorter American benefits durations than in longer European ones.
Card et. al. (2015) find that the elasticity of unemployment duration with respect to the benefit level is much lower when the unemployment rate is low.
Cohen and Ganong (2024) estimate that the effect of cutting benefit duration in Florida, where benefits are currently 12 weeks, would be relatively small (0.14). While the effect of cutting duration in France (currently 104 weeks) would be larger (0.80).
Nekoei and Weber (2017) find that extending unemployment benefits improves job quality and increases reemployment wages by improving the quality of employer-employee matches. Caliendo, Tatsiramos, Uhlendorff (2012) find that workers who receive extended benefits experience better job stability and higher re-employment wages compared to workers who exhaust benefits.
Farooq, Kugler, and Muratori (2020) find that more generous UI benefits improve both match quality and employer quality, with particularly strong effects for workers who are more likely to be liquidity constrained, including women, minorities, and less-educated workers.
Tatsiramos (2004) finds that UI recipients who search longer while unemployed obtain more stability in their subsequent employment. Centeno and Novo (2006) find that more generous UI benefits increase expected tenure of job matches, especially among less educated workers.