Unemployment Insurance and State Economic Activity

The unemployment insurance (UI) system collects premiums from firms and provides temporary compensation to involuntarily unemployed workers. The system has traditionally been viewed as an automatic stabilizer for national and area economies. This paper examines the impacts that UI benefits and contributions have had upon general economic activity in California and Michigan, large states that have experienced episodes of moderate and high unemployment rates, respectively, during the past two decades. For each state, we prepare a multiequation model of the economy and impose constraints represented by cointegrating vectors. Impulse responses measuring the impact of UI benefits and contributions on the economies are obtained from the models. The strengths of the responses are assessed using significance tests based upon distributions that have been derived for models containing cointegrating vectors. The results indicate that UI benefits and contributions provide little impact of consequence upon general economic activity in the two states. [E24]