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Identifying Unemployment Insurance Income Effects with a Quasi-Natural Experiment

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JEL Code 
J65 - Unemployment Insurance; Severance Pay; Plant Closings
J64 - Unemployment: Models, Duration, Incidence, and Job Search
J23 - Employment Determination; Job Creation; Demand for Labor; Self-Employment
This paper acknowledges that UI has a non-distortionary income effect generated by easing the liquidity constraints of the unemployed. Using an exogenous increase in the entitlement period as a quasi-experimental setting, we find evidence of an important income effect. The extension of the entitlement period prolongs unemployment spells, but its effect is decreasing with the degree of liquidity constraints (indexed by wages quintiles). An exception to this pattern is the behavior of individuals in the first wages quintile. The fact that the most constrained individuals extend the least their unemployment spells conforms to the nonstationarity of the job search process. This result points to the possibility that the UI system may become regressive, benefiting significantly less those at the bottom of the wage distribution, who find it harder to benefit from extended UI entitlements.
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