The Effect of Cutting Unemployment Compensation Duration on Unemployment Rate and Wages

To estimate the effect of a decrease in unemployment compensation duration on unemployment rate and wages, this paper utilizes a quasi-experiment and implements a difference-in-differences (DID) methodology to evaluate the impact of cutting unemployment compensation (UC) duration from 26 weeks to 20 weeks in 2012 on unemployment rate by comparing the treatment group, the Michigan state, with the adjacent control states, Indiana and Ohio. This paper also implements a Triple-D methodology to evaluate the effect of cutting UC duration across regions and categorizes each state in Metropolitan Areas (metro), Micropolitan Areas (micro) and countryside. Lastly, this paper tests the effect of cutting UC duration on average weekly earnings in 2012 using the same DID method in three major industries of the Michigan State, Manufacturing Sector, Goods-Producing Sector and Private Service Providing Sector. My results conclude that the cutting of UC duration decreases unemployment rate by 1.377 percentage points state-widely and has a larger impact on the metro areas compare with micro areas. My findings report that there was a decrease in wages by approximately 90 dollars in 2012 Manufacturing and Goods-Producing sectors.