Unemployment Insurance and Consumer Credit

This paper examines the impact of unemployment insurance (UI) on credit markets. Exploiting heterogeneity in the generosity of unemployment insurance across US states and over time, we find that UI helps the unemployed avoid defaulting on their debt. For every $1,000 increase in maximum UI benefits, mortgage delinquency drops by 2% and the eviction rate drops by 10% among unemployed homeowners. We also find that lenders respond to this decline in default risk by expanding credit access for low-income households who are at risk of being laid off. For every $1,000 increase maximum UI benefits, low-income households are offered $900 (4%) more in credit card debt as well as lower interest rates on credit cards and mortgages (0.5% reduction). These results show that the poor benefit from the insurance provided by a stronger social safety net even without experiencing a negative shock. * Hsu: Federal Reserve Board of Governors, 20th Street and Constitution Avenue N.W., Washington, D.C. 20551 (email: [email protected]); Matsa: Kellogg School of Management, Northwestern University, 2001 Sheridan Road, Evanston, IL 60208 (e-mail: [email protected]); Melzer: Kellogg School of Management, Northwestern University, 2001 Sheridan Road, Evanston, IL 60208 (e-mail: b-melzer@ kellogg.northwestern.edu).