Journal of Econometrics 28 (1985) 85-101.

North-Holland

UNEMPLOYMENT INSURANCE AND THE DISTRIBUTION OF

UNEMPLOYMENT SPELLS*

Robert MOFFITT
Brown University, Providence, RI 02912, USA

In this paper administrative data from the unemployment-insurance (UI) system are used to
examine the distribution of unemployment spells. Hazard plots of the data reveal a strong
clustering around the benefit exhaustion point. In addition, estimation of the effects of the
exhaustion point and of the UI benefit level on spell lengths obtained with a non-parametric
proportional-hazards model - estimated by direct maximization of the genera1 likelihood
function - shows significant effects of both. However, the effect of the exhaustion point on the
hazard is not proportional, making detection of its effect somewhat difficult.

1. Introduction

This paper is an econometric examination of the effect of unemployment

insurance (UI) on the distribution of unemployment spells. Although there has
been a considerable amount of econometric work on this topic already, the
present work differs from most prior studies in several respects. First, attention
is focused upon the distribution of spells as wdl as the mean. Non-parametric
Kaplan-Meier estimators are used for the initial analysis of the empirical
distribution function and proportional-hazards estimators with non-parametric
baseline hazards are used for the later analyses with multiple, time-varying
regressors. The latter model is estimated with general maximum-likelihood
[Bailey (1979, 1984)] rather than with the partial-likelihood technique outlined
originally by Cox (1972) and used in most subsequent work. The advantage of
the general maximum-likelihood method is that estimates of the incidental
parameters in the baseline hazard are readily provided as part of the estimation
procedure, along with their asymptotic standard errors. Second, the examina-
tion of spell distributions immediately reveals a need to focus on the maximum
potential duration of UI benefits. As will be seen in section 3 of the paper, the

*The research reported in this paper is a continuation of research initially conducted at

Mathematics Policy Research under contract to the Department of Labor. The author would like
to thank Walter Corson of MPR for comments and assistance on the project. Also, Meg Beardslee
prepared the original data files and provided them from MPR. All errors are those of the author.

0304-4076/85/$3.30~1985, Elsevier Science Publishers B.V. (North-Holland)

 86 R. Moflt~ Unemployment insurance and spells

simple Kaplan-Meier estimators show that the spell distribution is strongly

affected by the benefit exhaustion point. The analysis here, unlike those in
some prior studies [Clark and Summers (1983) Ehrenberg and Oaxaca (1976)
Kiefer and Neumann (1979)], indicates strong and significant effects of poten-
tial UI duration on unemployment spells. Third, the focus on potential
duration leads in turn to an examination of the effect of cyclical factors on the
distribution of spells and on the effects of UI on spell distributions over the
cycle. This issue must arise because the potential duration of UI benefits
expands and contracts over the cycle as both automatic and discretionary
extensions of benefits are provided and eliminated. The effects of these benefit
extensions are potentially confounded by the effects of the business cycle itself.
The study also differs from many prior ones in the type of data set used.
Most prior studies (such as the three on potential duration referenced above)
employ household survey data sets such as the Current Population Survey, the
National Longitudinal Surveys, or data from the negative income tax experi-
ments. In contrast, the data here are drawn from the UI administrative system.
The advantage of an administrative data set is that its information on the level
of the individual UI benefit and the maximum number of weeks of benefits for
which he or she is eligible are highly accurate, as is the information on the
number of weeks of benefits collected. There are also few survey-date trunca-
tion problems as there are in the household surveys, since the data are
available for several years in the past. The primary disadvantage of the data is
that the dependent variable, weeks of UI benefits collected, is by definition
truncated at the point of maximum benefits; consequently no information on
spell distributions beyond the exhaustion point is observed.
The spirit of the analysis here is exploratory. No structural job-search
models are estimated and unobserved heterogeneity is ignored. Nevertheless,
the findings are in broad agreement with the rudimentary predictions of simple
job-search models.

2. Theoretical considerations

The usual model of the effect of UI on unemp!oyment spells is based upon

models of job search under uncertainty [Lippman and McCall (1976)]. In the
simplest model an individual samples from a known, fixed wage distribution
for jobs with infinite durations. If the rest of the environment is likewise
stationary, and if an optimal reservation-wage policy exists, the reservation
wage is constant. When UI is added to the model [Burdett (1979) Mortensen
(1977)] the cost of unemployment is lowered. Here the maximum potential
duration of benefits is important. If an individual who is eligible for a benefit
B for a maximum of P weeks has been unemployed t weeks, the present value
 R. MO@. Unemplqvment insurunce und spells 87

of discounted lifetime income at that point is

V=b+

I
l-F(V)
l+r E( ;iw>w:)+$jy+i if tlP,

=I-F(w:)
l+r E( ;iw>w.)+$&+i if t>P,

where F is the distribution function of wages, r is the interest rate, and the
existence of an optimal reservation wage (w,*) policy is assumed. The non-
stationarity induced by the reduction of the UI benefit to zero at t = P can be
shown to generate a falling reservation wage from t = 1 to t = P, after which
the reservation wage is again constant. This in turn implies that the hazard
(that is, the conditional probability of exit) rises up to t = P and is constant
thereafter. This is clearly an empirically testable proposition. In addition,
increases in B and in P increase the reservation wage and hence lower the
hazard (see Burdett and Mortensen).
Rather similar implications are generated by the standard labor-leisure
model of unemployment duration [Moffitt and Nicholson (1982)]. If an unem-
ployed individuals utility function is V(U, Y), where U is the number of weeks
of unemployment (yielding positive utility) and Y is discounted lifetime
income, then the choice of U can be analyzed in terms of the static labor
supply model under certainty. The maximum weeks of UI receipt creates a
convex kink in the lifetime budget constraint; consequently, if there is hetero-
geneity in the population in tastes for unemployment-leisure, there will be
observed in any data set a clustering of observations around the kink. Again,
both increases in B and P increase the lengths of unemployment spells in this
model.
As noted in the Introduction, there have been many empirical studies of the
effect of UI on unemployment spells [see Hamermesh (1977) for a review of
many of the earlier ones]. The bulk of these studies have examined the effect of
UI benefit levels rather than maximum durations, and have for the most part
found the predicted effects. Those studies that have included maximum-dura-
tion variables have yielded more mixed results, for such variables are often
insignificant [Clark and Summers (1983) Ehrenberg and Oaxaca (1976), Kiefer
and Neumann (1979)]. However, there have been several findings of positive
effects of maximum duration as well [Fishe (1982) Katz and Ochs (1983),
Moffitt and Nicholson (1982), Newton and Rosen (1979), Nicholson (1981)].

It is assumed that there is one and only one job offer per period.
Mortensen shows that the total effect of UI on unemployment spell lengths is ambiguous, for if
there is a non-zero probability of layoff in the future UI benefits increase the payoff to returning to
work as well.
88 R. Mojitt, Unemployment insurance and spells

Nevertheless, there has been no direct examination of spell distributions to

determine if the hazard patterns and clusterings mentioned above are present.
In fact, when this aspect of the problem is examined directly and when the
effect of maximum duration on spell lengths is analyzed in this light, it appears
that the overall effect of increases in maximum duration is quite slight (if not
insignificant) but that the effects in the part of the distribution around the
exhaustion point are quite strong.

3. Data

The data used for the analysis are drawn from UI administrative records
assembled in a file called the Continuous Wage and Benefit History (CWBH).
Collected by state UI offices under the supervision of the Department of
Labor, the CWBH data are obtained by randomly sampling all the new UI
recipients each month in each of thirteen states in the U.S. Thus the sampling
frame is all cohorts who have begun receiving UI benefits since the CWBH
data collection effort began, which ranges from 1978 to 1980 across the states
involved. Every quarter since the inception of the data collection, UI records in
each state are passed and data from old cohorts still in the system as well as
the data from newly sampled cohorts are added to the existing file. The extract
used here was obtained from the March 31, 1983 CWBH file, which consists of
data on all cohorts who had entered the system up to that time.
Since the data are drawn from administrative records, exact information is
available on the individuals benefit, the maximum number of weeks for which
he is eligible, and the number of weeks he has actually collected benefits (only
males are examined here). As noted in the introduction, the truncation at the
maximum duration point implies that the distribution of unemployment spells
beyond the truncation point cannot be analyzed. In addition, since a large
number of spells were in progress on March 31, 1983, many observations in the
sample are also truncated at that point. Accurate data on benefit levels and
maximum potential duration are also important, for both vary across states
and across individuals within most states. The exception to this rule are
so-called uniform duration states, which set the same potential duration for
all recipients; only two of the states in the present sample follow this
procedure. However, despite the cross-state and cross-individual variations in
potential duration, more than 90 percent fall within the range 20-26 weeks.
In addition to these regular benefits, the extended benefits (EB) program
provides up to 13 extra weeks of benefits during cyclical downturns, thus
providing a maximum of 39 weeks of benefits. Also, in major recessions such
as that in 1974-1975 and 1982-1983, Congress usually legislates additional
weeks of benefits. The final few months of data in the present analysis file are
affected by the Federal Supplementary Compensation program, which took
effect in the Fall of 1982 and provided up to 62 weeks of benefits. Because this
 R. Mojitt, Unemplqvment insumnce und spells 89

Table 1
Means of variables used in analysis.

Standard
Mean deviation Minimum Maximum

Age 36.9 12.X 17.0 X2.0

Schooling 11.6 2.4 0.0 17.0
Race (= 1 if white) 0.79 0.41 0.0 1 .o
Net wagei $167.4 $67.X $18.3 $486.2
Unemployment rate X.7 2.1 4.7 14.x
Weekly UI benefitd $102.5 $28.1 $13.6 $160.0
Potential duration 34.3 X.9 X.0 53.0
Weeks of UI receipt 13.0 10.x 1.0 39.0

N = 462X. number truncated = 1297.

Weekly earnings on pre-UI lob. net of taxes. measured in 1977 dollars
Measured in first week of UI receipt.
In 1977 dollars.

program was enacted quite late, few individuals in the present file have weeks
of receipt in excess of 39; hence the distribution of weeks beyond 39 will not
be examined.3
These benefit extensions do create some problems for continuous time
estimations. First, theoretically they create problems because the models in the
previous section all assume a stationary environment. Second, computationally
time-varying variables often create difficulties in the estimation of continuous-
time models. However, since time will be discretized here (see below) this will
not be a problem. Third, the extensions make it a bit difficult to analyze the
empirical distribution function of the data because it is not a stationary
distribution. To circumvent this problem, two subsamples were formed from
the CWBH data, one a constant-duration subsample and one a varying-
duration subsample. The former was chosen from the set of individuals for
whom potential duration did not change during the first 26 to 39 weeks of their
spells, and the latter was chosen from the residual set. A stationary empirical
distribution function can be obtained from the first of these subsamples. The
resulting working analysis file includes 4628 men, about half of whom are in
each of the subsamples. Weights are also assigned to each individual, partly
because the two subsamples were drawn at different rates and partly because
the CWBH draws its samples at different rates over time and across states.4
The means of the variables to be used in the analysis are shown in table 1.
The mean individual is about 37 years old and has 11 years of schooling.

The paucity of observations is a problem only because of the non-parametric procedures used.
which require separate estimates of the hazard at each week (see below). Those individuals with
weeks in excess of 39 were kept in the sample but were truncated at 39.
4The constant-duration sample was sampled at a much higher rate because only a minority of
the cases in the source file had no change in duration.
90 R. Mojirt. Unemplqvmenr m~urunce and spells

Wages net of taxes on the pre-UI job are $167 per week. The unemployment
rate varied significantly over the 1978-1983 period and across states, ranging
from 4.7 percent to 14.8 percent (the unemployment rates are monthly CPS
rates by state, interpolated to obtain weekly figures). The mean UI benefit is
$103, while the mean potential duration is 34 weeks, ranging from 8 to 53
(most are 39 or below; the 40 + durations are from the recent periods with the
FSC program). About 13 weeks of UI receipt are observed on average, ranging
from 1 to 39; these include truncated observations as well, which number
about one-fourth of the sample.

4. Analysis

4.1. Kaplan-Meier estimators

The Kaplan-Meier (KM) estimator of the empirical distribution function of

a truncated data series is obtained by calculating the hazard at each time t
using only those observations which are still at risk that time [see Kaplan and
Meier (1958) or Kalbfleisch and Prentice (1980)]. The hazard is calculated
separately for each point at which any non-zero number of observations exit;
hence the distribution obtained is a discrete one, and the implied distribution
function is a step function. In the present application, the dependent variable
(number of weeks of benefits collected) can be considered to be discrete in a
natural fashion, as it will be throughout the paper. To define the KM
estimator, let d, be the number of individuals who complete their spells at time
I and let n, be the number of individuals at risk just prior to t - that is, all
individuals who have not completed their spells or been truncated by time t.
Then the KM estimator of the hazard at time t is

x = f(t) d!
1 -F(t) =c3
where f and F are the density and distribution function of exit times.5 The
estimated survivor function, S,, and distribution function, F,, are estimated as

S, = Prob(exit later than t) = fi (1 -A,), (2)

r=l

F,=l-s,. (3)

The KM estimator of the distribution function has been shown to be

strongly consistent [see, e.g., Lawless (1982) for a discussion and references].

Roth d, and PI, are weighted in the present application.

 R. Mojitt, Unemployment insurance and spells 91

Fig. 1. Hazard plots for constant-duration sample and subsamples

The KM estimator is also a maximum likelihood estimator (the likelihood

function is given below) whose information matrix yields a consistent estimator
of the standard errors of the KM hazards.
In the present application the KM estimators were calculated only for the
constant-duration subsample, inasmuch as KM estimators on a non-stationary
sample would have little meaning. The risk set at time t is the set of all those
who have not exited by time t - 1 or been censored by time t - 1, but who are
at risk of being observed to exit at time I (meaning that their potential
duration time is at t + 1 or later). Plots of the estimated KM hazards are
shown in fig. 1 for the total (constant-duration) sample and for several
subsamples. The upper line shows the hazard plot for the total constant-dura-
tion sample. There is a noticeable decline in the hazard in the first few weeks
(up to eight or so), after which the hazard is more or less constant until about
week 20. After that point the curve shows two noticeable spikes, one at t = 25
and one at t = 37 and with high hazard rates in the vicinity of both points. The
spikes clearly point to an effect of the UI system on the hazard rate and
provide prima facie confirmation of the theoretical predictions discussed
previously in the paper. To test the evidence for this effect further, the sample
92 R. Moffitt, Unemployment insurance and spells

was subdivided into two, one composed of all those with potential duration of
26 weeks or less and one composed of those with duration greater than 26. The
second panel of the figure shows their plots. Over the first 20 or so weeks, there
is little visual evidence of a difference in the hazards, but there is a noticeable
jump in the hazard for those with lower potential duration just prior to
exhaustion. The distributions cannot be compared at times greater than 26, but
the difference below 26 weeks provides further confirmation of the expected
effects.
The lower panel shows the plots of a similar exercise to detect effects of the
UI benefit level. Plots for the high-benefit and a low-benefit subsample (the
mean benefit was used as the dividing line) are shown. The two subsamples
have similar hazards in all regions except those around the two exhaustion
points, where the high-benefit sample has the lower hazard. The difference is
particularly large at the t = 26 exhaustion point, suggesting that there may be
interactions between potential duration and the benefit. Alternatively, since
potential duration is not controlled in these plots, there may be a strong
association between potential duration and the benefit level. The correlation
between them is 0.41.
Aside from the UI-specific characteristics of the distributions the shapes are
similar to those found in other studies. There are many spells that are fairly
short or at least not terribly long - the survivor function drops to 0.50 by the
10th week and 0.33 by the 18th week. There is a slight suggestion of negative
duration dependence in the early weeks of the distribution, a suggestion that
will show up strongly in the multivariate analysis below. But the UI effects are
particularly marked in these plots; simple parametric fits of unemployment-spell
distributions likely misrepresent the distributions in regions nearby to UI
exhaustion points.
Some slightly more formal evidence is provided in table 2, which shows the
results of several least-squares regressions on the KM survivor-function esti-
mates obtained from the above exercise. A regression of log($) on t (without
an intercept) will yield a coefficient equal to the average hazard (and if the
distribution is exactly exponential, the R-squared will be one). If log( -log(&))
is regressed upon log(r), the coefficient will represent the duration dependence
parameter of a Weibull distribution. The first column of the table indicates
that the average hazard in the sample is about 0.07; the high R-squared
indicates that the distribution could easily be mistaken for an exponential
without the visual analysis. The second column indicates that the fitted Weibull
dependence parameter is quite close to one, indicating no duration depen-
dence. The following columns show similar regressions on the separate high-low
potential duration and benefit subsamples, together with pooled regressions
testing for differences in hazards across the groups. All the coefficients of the
interaction variables in the pooled regressions are of the expected signs - those
with higher potential durations and higher benefits have lower hazards and
 R. Mofitt# Unemplqvment insurunce und spells 93

Table 2
Summary regressions on KM estimates (standard errors in parentheses).

High-low P subsamples
Total sample Low P High P Pooled
L.S,b LLSF LS, LLS, LS, LLS, Ls, LLS,

t -0.071 - -0.065 - - 0.062 -0.065 -

(0.001) (0.001) (O.OOO)d - (0.001)

log(r) - 0.986 - 0.931 0.882 0.880

(0.023) (0.026) (0.016) (0.018)
Di - - 0.004 -
(0.001)
Dlog(t) - - - - - 0.005
(0.011)
Inter- - -2.656 - - 2.587 - 2.425 - 2.455
cept (0.065) (0.629) (0.044) - (0.042)
R2 0.994 0.980 0.991 0.982 0.999 0.989 0.994 0.9x3
n 38 38 25 25 38 38 50 50

High-low B subsamples
Total sample Low B High B Pooled
LS, LLS, Ls, LLS, Ls, LLS, LS, LLS,

t - 0.071 - 0.079 - - 0.063

(0.001) (0.002) (o.OOOy

log(r) 0.986 1.068 0.971

(0.023) - (0.032) (0.023)
Dt - -

D log(r) - - - 0.034
(0.013)
Inter- - - 2.656 -2.849 - - 2.288 - 2.565
cept (0.065) - (0.088) (0.053) (0.061)
R2 0.994 0.980 0.981 0.970 0.998 0.982 0.98X 0.964
n 38 38 36 36 38 38 74 74

Only I 5 26 observations included

hLS, = log( S,).
LLS, = log( - log( s, )),
dLess than 0.0005.

D = 1 if in high-P or high-B samples, = 0 otherwise.

P = potential duration.
B = UI benefit.
 94 R. MoJitt. Unemplqvment insurunce and spells

more negative duration dependence, but the difference is not always signifi-
cant. In particular, the Weibull fit for the pooled potential duration subsamples
indicates no significant difference in duration dependence across the high and
low potential duration groups. No doubt the regression is failing to pick up the
difference in distributions which only occurs in the 20-25 week range; this will
reappear further in the paper. For individual groups, the results in the table
indicate generally negative duration dependence but occasional positive dura-
tion dependence (for the low-benefit group).

4.2. Non-parametric proportional hazards estimates

In light of the non-standard form of the empirical distribution function it

would be hazardous to assume a parametric form for the function when
moving to the multivariate analysis. Instead it will be assumed that the hazard
is of the well-known proportional hazards form with a non-parametric baseline
hazard of the type suggested by Cox (1972). Let Z,, be a vector of exogenous
characteristics of individual i at time t and let p be its associated coefficient
vector. Then the assumed hazard form is

(4)
where x, is the baseline hazard. To estimate the parameter vector /3, Cox
proposed a partial likelihood function which does not contain any of the
incidental parameters h,. Unfortunately, the incidental parameters are of
direct interest here, for one of the goals of the analysis will be to determine if a
variables or variables for potential duration in the Z,, vector can smooth out
the baseline hazard. Consequently the approach here is to instead directly
maximize the general likelihood function with respect to both the p vector and
the incidental parameters jointly. Let A be the set of untruncated observations
and B the set of truncated observations. The probability of an untruncated
observation exiting at time t, is
1, - 1
p, = A,,,s=lI-I (1-u> i=A, (5)

and the probability of a truncated observation at time t, is

I,- 1

Q,=7~l(1-h,)~ i E B. (6)

The log-likelihood function for the sample is therefore

L= c w,log(p,) + c w&idQ,L (7)

IGA IEB
 R. Moffiit, Unemplqment insurunce und spells 95

where sampling weights ( w,) for each observation have been added. Maximiza-
tion is conducted in the usual fashion by obtaining the values of the parameter
vector j3 and the incidental parameter vector which equate the gradients to
zero:

z;r,k$-
1, - 1 t,-
C MirZ,,k + C wi C MmZiTk= O,
1
(8)
7=1 IEB 7=1

k= l,..., K,

t=l , . . . ,38,

Note that at p = 0 the solutions to (9) are the KM estimators in (1).

The advantage of directly maximizing the likelihood function is that esti-
mates of the incidental parameters are directly obtained. A potential disad-
vantage is the computational one of having to maximize a function with
respect to a moderately large number of parameters. In the present application
no problems were encountered and the maximum was always easily achieved
without undue numbers of iterations (starting values of p = 0 and x, set equal
to the KM estimators of the previous section proved excellent). In part this is
because the largest section of the Hessian is diagonal for, as revealed by
inspection of (9) the covariance between the baseline hazards at different times
is zero. However, it should be mentioned that an alternative strategy is to
obtain estimates of the /3 vector from the Cox partial-likelihood function and
then to obtain estimates of the baseline hazards in some other way. Unfor-
tunately, simple methods of obtaining the baseline hazards are all only
approximations to the true values and, in addition, have more complicated
formulas for standard errors [see, e.g., Miller (1981) for a brief summary of
some of the methods]. An alternative, suggested by Kalbfleisch and Prentice
(1980) is to again obtain the p vector from the partial likelihood and then to
obtain estimates of the baseline hazards by solution of (9) for each baseline-
hazard parameter. However, given the non-linearity of (9) and the cumber-
someness of the approach, its computation is not more convenient than direct
maximization.
96 R. Mofitt, Unemplqvment insurunce and spells

It is also important to note that the estimates of the /3 vector and the
baseline hazard from direct maximization are consistent and asymptotically
normal. Bailey (1979, 1984) has recently shown that the Cox model and the
general maximum-likelihood (GML) model just described are asymptotically
equivalent, and that the information matrix obtained by inverting a consistent
estimate of the second-derivatives matrix provides the correct joint covariance
matrix of all the parameters. Thus it appears that the incidental-parameter
problems of the Neymann-Scott variety do not arise here. In the present
application all maximization was obtained with a scoring method and the
second-derivatives matrix was obtained from the outer product of the first
derivatives.
Table 3 shows the results of several estimates of the model. Columns (1) and
(2) report estimates on the constant-duration sample for which the above KM
estimators were derived. In column (1) only the UI benefit and potential
duration (P) are entered. Interestingly, both are insignificant at conventional
levels and the benefit coefficient has the wrong sign. Thus the results are in
conflict with the above two-sample analyses of the empirical distribution.
Examination of the estimates of the baseline-hazard parameters (not shown)
reveals the reason, for the bimodal distribution is maintained in the baseline
hazard - that is, the two covariates have failed to move the spikes from the
baseline hazard into the covariate coefficient vector. Clearly this is a result of
the proportional-hazards assumption, which has been known to cause prob-
lems whenever the basic proportionality assumption of that model fails. Here it
fails, as fig. 1 clearly indicates, for neither B nor P shifts the entire distribution
proportionately. Indeed, if the spikes are not attributed to the UI variables.
there is little difference in the high-low B and P subdistributions.
Column (2) shows the results of adding a set of additional covariates. The
insignificance of potential duration remains but the benefit is now highly
significant and of the expected sign. The source of the change is the introduc-
tion of the net pre-UI wage, which is highly correlated with the benefit since
benefits are set partly on the basis of past covered earnings (the correlation
coefficient is 0.71). The pre-UI wage has a significantly positive effect on the
likelihood of exit, perhaps because the pre-UI wage is positively correlated
with the potential post-U1 wage.6
Rather than continue to explore the equation on the constant-duration
subsample, the equation was reestimated on the total sample including vary-
ing-duration observations. The results are shown in column (3) (both P, and U,
vary weekly in this data set). As the results indicate, the benefit coefficient
remains negative but the P coefficient is now significant and positive. The

In some other analyses the variables B and W have been interacted either in the form of a
replacement ratio B/W or as a net wage ( W- B) = W(l - r), where r= B/W. The latter
restriction was tested and rejected here. The former was also estimated but the separate B - w
specification was retained for, on principle, their separate effects were desired.
 R. Mojit~, Unetnplqvnwnr
insurunce und spelk 97

Table 3
GML estimates of parameter vector /3 (standard errors in parentheses).

Non-parametric Parametric

UP ah (3) (4) (5) (6)

Ed 0.001 - 0.063 - 0.066 - 0.065 ~ 0.063 - 0.063

(0.016) (0.002) (0.001) (0.001) (0.001) (0.001)

P, - 0.010 -0.011 0.005c - o.020c ~ 0.014 0.037

(0.008) (0.008) (0.002) (0.002) (0.002) (0.005)

Age - 0.002 - 0.001 ~ 0.002 - 0.002 ~ 0.001

(0.003) (0.001) (0.001) (0.001) (0.001 )
Race 0.290e 0.354 0.368 0.370 0.373
(0.095) (0.028) (0.028) (0.028) (0.028)
Schooling - 0.023 - 0.025e - 0.02hC - 0.025 ~ 0.035
(0.015) (0.004) (0.004) (0.004) (0.004)
Net wage 0.003 0.003 o.oo3 0.003 (I.003
(0.001) (O.Ow (O.OOil) (O.(HX)) (o.mo)
Y - 0.014 - 0.025 -0.02X - 0.030 - 0.135
(0.043) (0.007) (0.00X) (0.007) (0.026)

=,, 0.160 ~ 0.217 -0.218

(0.029) (0.019) (0.019)

z2, 0 102 0.159 0.162

(0.042) (0.029) (0 029)

=3, 0 092 0.0x7 0.0x3

(0 017) (0.013) (0.013)
0.003
(0.001)
Constant ~ 0.984 ~ 0.0x5
(0.105j (0 234)
Log likelihood - 3465.2 - 3446.1 - 13036 ~ 12994 - 13oxx - 130x5

az,, = P, - 1.
Z,, = max(0. P, - f - 5).
Z,, = max(0. P, - r - 10).
P, = Potential duration at time r,
U, = Unemployment rate at time 1.
B = UI benefit.
hConstant-P sample.
A,, A 2, x3. normalized to mean of remaining baseline hazards.
d Variable divided by 10.
Significant at lo-percent level.

reason for the positive sign appears to be again related to the bimodality of the
baseline hazard (which remains), for an increase in duration from, say, 26
weeks to 30 weeks probably shows up as an increase in the hazard in the
30-week region and a decrease in the hazard in the 26-week region. The net
effect could be of either sign but turns out to be positive, as the results indicate.
In an attempt to pick up the spike in the hazards more directly (since the
simple P, variable still fits only a proportional shift) the variable (P, - t) was
added to the equation (results not shown). This variable, which may be termed
time-to-exhaustion, was expected to have a negative coefficient given the
location of the spikes in the baseline hazard. Surprisingly, however, its coeffi-
cient was significantly positive. Inspection of the new baseline hazard revealed
the reason - the variable (P, - t) picks up the negative duration dependence of
t itself rather than the effects of P,. (Recall the significant negative duration
dependence in the early weeks of the spell - see fig. 1.) Unfortunately, in a
model as unrestricted as that estimated here the separate effects of t, P,, and
(P, - t) cannot be identified; hence duration dependence independent of the
UI system cannot be separated from time-to-exhaustion. Nevertheless, since
the negative duration dependence appears to occur mainly in the early weeks
while the positive duration dependence of the exhaustion spikes occurs in later
weeks, a quadratic, or U-shaped hazard is also possible. The results of testing
such a quadratic hazard are shown in column (4) of table 3, where time-to-
exhaustion is splined at 5 and 10 weeks. The results confirm the quadratic
hypothesis: the hazard rises within 5 weeks of exhaustion, rises at a slower rate
between 5 and 10 weeks from exhaustion (-0.160 + 0.102 = -O.OSS), and
falls more than 10 weeks from exhaustion ( - 0.160 + 0.102 + 0.092 = 0.034).
Given the evidence in the simple KM estimators in the previous section, it
seems fair to ascribe the negative duration dependence to non-UI-related
factors and the positive duration dependence to the UI exhaustion point. Note
too that in this specification the linear P, term also has a significantly negative
coefficient. Unfortunately, the estimated baseline hazards in eq. (4) are still
bimodal, though somewhat attenuated; thus this problem has not been so1ved.s
Having resolved the conflict between the multivariate analysis and the KM
analysis and since no further progress on smoothing out the baseline hazard
appeared possible, the equation was estimated parametrically by replacing
the baseline hazards with a constant term in the exponent. The results are
shown in column (5). All the coefficients are quite close to those of the
non-parametric model.

5. Some implications of the coefficients

The implications of the estimated parameters for the effects of the covariates
on the expected duration of unemployment spells are shown in table 4. A
l-percent increase in the UI benefit increases the mean length by 0.36 percent.
At the means of the variables, this implies that a $10 per week increase in the
UI benefit (about a lo-percent increase) lengthens the unemployment spell by

The meaning of the linear f, coefficient is a bit hazier in this specification because it implies
that there is an effect at f, = 1. Moffitt and Nicholson (1982) hypothesize that such post-exhaustion
elrects may be wealth effects from the UI income received.
Of course one could simply add time-trend variables to pick up hazard spikes around t = 26
and r = 38 but this would be ad hoc and unrelated to each individuals measured P,.
 R. Mofltt. Unemplqvment insurmce und spells 99

Table 4
Elasticiues of covariates with respect to expected
duration.

Elasticity

B 0.36
P 0.16
Age 0.03
Race 0.11
Schooling 0.16
Net wage -0.12
u 0.12

aAll elasticities are evaluated at means of the varia-

bles, shown in table 1, except P, effect which is
measured at P = 26. Expected duration is calculated
as
52

E(r) = c rP,.

where 4 is defined in eq. (5). Parameters are taken

from eq. (5) in table 3. For f > P (= potential dura-
tion), variables Z,,, Zz,, and Z,, are set equal to
zero.

about half a week. The elasticity for increases in potential duration is 0.16,
implying that a l-week increase in potential duration from, say, 26 to 27 weeks
lengthens the unemployment spell by about 0.15 weeks. The results also
indicate rather small effects of age but large effects for the rest of the variables.
One of the variables of particular relevance to the UI system is the
unemployment rate, for benefit extensions in the UI system are generally
grated when the unemployment rate rises. When the unemployment-rate
elasticity in table 4 is evaluated at the mean, the implication is that an increase
in the unemployment rate of one percentage point adds only about one-fifth of
a week to the length of the mean unemployment spell, an implausibly small
amount. To explore the relation between potential duration and the unemploy-
ment further, an additional specification was tested which interacts the vari-
ables P, and CJ,. The results are shown in table 3, and indicate that there is a
significant positive coefficient on the interaction variable. This implies that the
disincentive effect of increases in potential duration (using only the linear P,
terms) on the multiplicative hazard is

ax
I_=
1
-0.0371 + O.O026U,.
a<At
Hence the disincentive effect of raising potential duration is smaller when the
unemployment rate is higher.
Finally, note that this effect can be used to define an optimal policy of
benefit extensions, loosely speaking. One definition of an optimal policy would
100 R. Mojitt. Unemployment insurance and spells

be one which holds the marginal disincentive effect constant. As eq. (11)
indicates, as the unemployment rate rises the disincentive effect of the benefit
extension falls and therefore P could be increased. At a 6-percent unemploy-
ment rate and at P = 26, a l-percent increase in the unemployment rate would
allow a 3.2-week increase in potential duration in this sense. An alternative
definition of optimal UI policy on benefit extensions is one which holds
exhaustion rates constant [Corson and Nicholson (1982)]. In the model here
the exhaustion rate is equal to the value of the survivor function at t = P and
can be calculated from eq. (2). Again at a 6-percent unemployment rate and at
P = 26, calculations of the effects of increases in U and P on exhaustion rates
show that a l-percent increase in the unemployment rate would permit a
4-week increase in P to hold exhaustion rates constant. The main difference
between this 4-week allowable extension and the 3.2-week extension allowed
under the constant-disincentive policy is that the constant-exhaustion-rate
policy ignores the extra disincentive effects generated by increasing P, disin-
centive effects which themselves increase exhaustion rates.

6. Summary

In this paper the effect of the unemployment insurance system on the

distribution of unemployment spells was examined with simple non-parametric
analyses of the empirical distribution of the spells of UI recipients and with
non-parametric proportional-hazards models. The results indicate that a lo-
percent increase in theU1 benefit increases spells by about half a week and
that a l-week increase in potential duration increases spells by about 0.15
weeks. The effect of potential duration on the distribution of spells shows up
clearly in the empirical distribution function in the form of spikes near the
common exhaustion points of 26 and 39 weeks, but it is difficult to capture
these effects in the ordinary proportional-hazards model. Analyses of the
baseline hazards provided by the non-parametric technique aided in the
identification of the effects of potential duration on the hazard, illustrating
the usefulness of the non-parametric approach.

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