Working Paper Revision

Labor Market Responses to Unemployment Insurance: The Role of Heterogeneity

Abstract: We document considerable scope of heterogeneity within the unemployed, especially when the unemployed are divided along eligibility and receipt of unemployment insurance (UI). We study the implications of this heterogeneity on UI’s insurance-incentive trade-off using a heterogeneous-agent job-search model capable of matching the wealth and income differences that distinguish UI recipients from non-recipients. Insurance benefits are larger for UI recipients who are predominantly wealth-poor. Meanwhile, incentive costs are nonmonotonic in wealth because the poorest individuals, who value employment, exhibit weak responses. Differential elasticities imply that accounting for the composition of recipients is material to aligning model predictions with empirical estimates.

Keywords: Unemployment Insurance; Fiscal Policy and Household Behavior; Job Search;

JEL Classification: E24; H31; J64; J65;

Status: Published in American Economic Journal: Macroeconomics

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Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2021-11

Number: 2019-022

Note: Publisher DOI:

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