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 eligibility, payment amount, and payment duration and combine them with microdata to estimate UI eligibility, take-up, and replacement rates at the individual level. We document how income and wealth levels affect unemployment risk, eligibility, take-up, and replacement rates over the course of unemployment. We evaluate whether these findings are important for shaping UI policy design using a general-equilibrium incomplete-markets model with a frictional labor market that matches our empirical findings. We show that a nested model that fails to match these findings yields a substantially less generous optimal UI policy.

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

JEL Classification: E24; H31; J64; J65;

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