In this paper, we show that countercyclical unemployment benefit extensions lead to jobless recoveries. We augment the standard Mortensen-Pissarides model to incorporate unemployment benefit expiration and state-dependent extensions of unemployment benefits. In the model, an extension of unemployment benefits slows down the recovery of vacancy creation in the aftermath of a recession. We calibrate the model to US data and show that it is quantitatively consistent with observed labor market dynamics, in particular the emergence of jobless recoveries after 1990. Furthermore, counterfactual experiments indicate that unemployment benefits are quantitatively important in explaining jobless recoveries.

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