The Implications of Labor Market Heterogeneity on Unemployment Insurance Design

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

Birinci, Serdar; See, Kurt

doi:10.20955/wp.2024.026

Working Paper Revision

The Implications of Labor Market Heterogeneity on Unemployment Insurance Design

Abstract: We digitize state-level and time-varying unemployment insurance (UI) laws on initial eligibility, payment amount, and payment duration and combine them with microdata on labor market outcomes to estimate UI eligibility, take-up, and replacement rates at the individual level. We document how levels of income and wealth affect unemployment risk, eligibility, take-up, and replacement rates both upon job loss and over the course of unemployment spells. We evaluate whether these empirical findings are important for shaping UI policy design using a general equilibrium incomplete markets model combined with a frictional labor market that matches our empirical findings. We show that a nested alternative model that fails to match these findings yields a substantially less generous optimal UI policy compared to the baseline model. Our empirical results are also relevant for researchers estimating the effects of UI policy changes on labor market outcomes.

Keywords: unemployment insurance; fiscal policy; household behavior; job search;

JEL Classification: E24; H31; J64; J65;

https://doi.org/10.20955/wp.2024.026