Question

2. In New York State, an individual's unemployment benefits depend on her previous earnings the higher the earnings, the higher the benefits, up until a maximum benefit level is reached. In 1989, the state legislator and governor unexpectedly increased the maximum level. This led to an increase in benefits for high earners, but no change in benefits for low earners Meyer and Mok, 2007]. How might a researcher take advantage of this scenario to conduct a difference-in- difference quasi-experiment to estimate the effect of unemployment benefits on unemployment durations? Be sure to describe both treatment group and the control group. What is the key assumption required for this quasi-experiment to generate unbiased estimates of the effect of unemployment insurance on unemployment duration?

Answer 1

Answer:

The scenario set up by the change in unemployment lends itself to a difference in difference approach, in which the first difference is across time and the second difference is across income level. The researcher would measure the change in unemployment duration for high earmers between the period of lower benefits and the period of higher benefits, and then compare this change to the change for the low eamers. The treatment group would be the high eaners and the control group would be the low eamers. The assumption that must hold for unbiased estimates is that in the absence of the policy change, both the treatment and control groups would have experienced the same change in unemployment duration across the periods preceding and following the policy change.