Labor Market Responses to Unemployment Insurance: The Role of Heterogeneity

RePEc Short ID: pbi318
ORCID iD: 0000-0001-7323-1932

Birinci, Serdar; See, Kurt

doi:10.20955/wp.2019.022

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;

https://doi.org/10.20955/wp.2019.022

Status: Published in American Economic Journal: Macroeconomics