Unemployment Insurance Take-up Rates in an Equilibrium Search Model

By Stéphane Auray, David L. Fuller and Damba Lkhagvasuren

http://d.repec.org/n?u=RePEc:crs:wpaper:2018-14&r=dge

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; private information associated with the UI non-collectors implies the market equilibrium is not Pareto optimal. The cause of the Pareto inefficiency is characterized along with the key features of collector vs. non-collector outcomes. Non-collectors transition to employment at a faster rate and a lower wage relative to the Pareto optimal arrival rates and wages. Quantitatively; this implies 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.

Why are people leave money on the sidewalk? There must be some sort of cost that people face in picking up that money. In the case on unemployment insurance, there is no clear and obvious cost, so the authors try it out with a heterogeneous utility cost to obtaining insurance benefits. Results are interesting and could lead the way to an identification strategy: try all the different potential reasons in a model and then check whether results make sense for observables.

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