Two papers on unemployment insurance and misallocation

Unemployment Insurance Take-up Rates in an Equilibrium Search Model

By Stéphane Auray, David Fuller and Lkhagvasuren Damba

From 1989-2012, on average 23% of those eligible for unemployment insurance (UI) benefits in the US did not collect them. In a search model with matching frictions, asymmetric information associated with the UI non-collectors implies an inefficiency in non-collector outcomes. This inefficiency is characterized along with the key features of collector vs. non-collector allocations. Specifically, the inefficiency implies that noncollectors transition to employment at a faster rate and a lower wage than the efficient levels. Quantitatively, the inefficiency amounts to 1.71% welfare loss in consumption equivalent terms for the average worker, with a 3.85% loss conditional on non-collection. With an endogenous take-up rate, the unemployment rate and average duration of unemployment respond significantly slower to changes in the UI benefit level, relative to the standard model with a 100% take-up rate.

Social Insurance and Occupational Mobility

By German Cubas and Pedro Silos

This paper studies how insurance from progressive taxation improves the matching of workers to occupations. We propose an equilibrium dynamic assignment model to illustrate how social insurance encourages mobility. Workers experiment to find their best occupational fit in a process filled with uncertainty. Risk aversion and limited earnings insurance induce workers to remain in unfitting occupations. We estimate the model using microdata from the United States and Germany. Higher earnings uncertainty explains the U.S. higher mobility rate. When workers in the United States enjoy Germany’s higher progressivity, mobility rises. Output and welfare gains are large.

By chance, there a two papers with a similar message about unemployment insurance in this week’s issue of NEP-DGE. Both argue that UI is essential in getting good fits on the labor market. This is especially true as the jobs and the labor market become more and more specialized.


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